Organizing Global Supply Chains: Input Cost Shares and Vertical Integration

Abstract

We study how the technological importance of inputs-measured by cost shares-is related to the decision to "make" or "buy" that input. Using detailed French international trade data and an instrumental variable approach based on self-constructed input-output tables, we show that multinationals vertically integrate high cost share inputs. A stylized incomplete contracting model with both ex-ante and ex-post inefficiencies explains why: technologically more important inputs are "made" when transaction cost economics type forces overpower property rights type forces. However, additional results show that both types forces are needed to explain the full patterns in the data.

Come Together: Firm Boundaries and Delegation

“…Consistent with the model's predictions, we find that suppliers of inputs that contribute more value to the production of a firm's output, as proxied by input-output coefficients, are more likely to be integrated. This finding is in line with the results of previous studies on firm boundaries (e.g., Acemoglu et al, 2010;Alfaro et al, 2019;Berlingieri, Pisch, and Steinwender, 2018). In this paper, we show theoretically and empirically that input value also affects delegation choices within the firm boundaries: top management delegates more decisions to suppliers of more valuable inputs.…”

Come Together: Firm Boundaries and Delegation

“…Our finding that suppliers of inputs that contribute more value to the production of a firm's output, as proxied by input-output coefficients, are more likely to be integrated is in line with the results of previous studies on firm boundaries (e.g., Alfaro et al, 2019;Berlingieri, Pisch, and Steinwender, 2020). In this paper, we show theoretically and empirically that input value also affects delegation choices within the firm boundaries: top management delegates more decisions to suppliers of more valuable inputs.…”

An Investment Perspective on Global Value Chains

“…The PRT theory predicts that MNCs outsource the production of key inputs to limit underinvestment in these crucial inputs. Recent empirical studies confirm that TCE and PRT forces jointly shape MNCs' outsourcing patterns Berlingieri, Pisch, and Steinwender 2018).…”

“…MNCs headquartered in advanced economies now use lower-cost countries for product manufacturing, technical support, customer service, claims processing, and data entry activities. Recent empirical studies reveal that MNCs in manufacturing GVCs tend to outsource the inputs that are less technologically important (Berlingieri, Pisch, and Steinwender 2018). Whether a multinational firm outsources the production of a given input also depends on the elasticity of demand it faces, the relative contractibility of stages along its value chain, and its own productivity Del Prete and Rungi 2017;Luck 2019).…”