Vertical Integration and Input Flows

Abstract

We use broad-based yet detailed data from the economy's goods-producing sectors to investigate firms' ownership of production chains. It does not appear that vertical ownership is primarily used to facilitate transfers of goods along the production chain, as is often presumed: Roughly one-half of upstream establishments report no shipments to downstream establishments within the same firm. We propose an alternative explanation for vertical ownership, namely that it promotes efficient intra-firm transfers of intangible inputs. We show evidence consistent with this hypothesis, including the fact that, after a change of ownership, an acquired establishment begins to resemble the acquiring firm along multiple dimensions.

The Incentives for Vertical Mergers and Vertical Integration

“…In contrast, ex post effects occur when innovation is realized, as integration minimizes the potential for hold up costs and ex post bargaining over the already patented innovation. As a result, firms are more likely to integrate when the innovation is realized and patented.Our findings contribute to a large literature examining the determinants of vertical integration (see Lafontaine and Slade (2007) and Bresnahan and Levin (2012) for surveys), and to recent papers linking vertical integration to innovation and intangible assets (Aghion and Tirole (1994), Acemoglu, Aghion, Griffith, and Zilbotti (2010) 8 , and Atalay, Hortacsu, and Syverson (2014) These authors show that, in a sample of UK manufacturing firms, the intensity of backward integration is positively (negatively) related to the R&D intensity of the downstream (upstream) industry. Our approach is complementary as we focus on the stage of innovation, vertical acquisitions, and within-firm integration in a large sample of U.S. firms.…”

“…Our findings contribute to a large literature examining the determinants of vertical integration (see Lafontaine and Slade (2007) and Bresnahan and Levin (2012) for surveys), and to recent papers linking vertical integration to innovation and intangible assets (Aghion and Tirole (1994), Acemoglu, Aghion, Griffith, and Zilbotti (2010) 8 , and Atalay, Hortacsu, and Syverson (2014)). Our results are complementary to the findings of Atalay, Hortacsu, and Syverson (2014).…”

“…Our results are complementary to the findings of Atalay, Hortacsu, and Syverson (2014). Using comprehensive data on ownership structure, production, and shipment patterns, they report that upstream units ship only small shares of their outputs to own-firm downstream plants.…”

“…Consistent with Atalay, Hortacsu, and Syverson (2014), they are larger, older, and are more capital-intensive firms with lower growth opportunities (M B). Vertically integrated firms also have more business segments, as identified from the (NAICS-based) Compustat segment tapes.…”

Intangible Assets and the Organization of Global Supply Chains

“…On this, Atalay, Hortacsu and Syverson (2014) emphasize the importance of intangible inputs within a firm by providing evidence for an alternative rationale behind vertical integration and its role in promoting efficient intra-firm transfers of intangible inputs such as marketing know-how, intellectual property, and R&D capital. In other words, they show, in line with the property right theory, that integration is not a tool to insure a smooth flow of physical inputs from upstream towards downstream activities, but a strategy to secure efficient transmission of technology across stages along the chain.…”