Organizing the Global Value Chain: a firm-level test

Del Prete, Davide and Rungi, Armando Organizing the Global Value Chain: a firm-level test. EIC working paper series #4/2015 IMT School for Advanced Studies Lucca ISSN 2279-6894.

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Abstract

In this paper we study the organization of Global Value Chains on a sample of about 4,000 manufacturing parent companies operating more than 90,000 affiliates on a global scale, which chose to integrate at least once in the period 2004–2012. Assuming a technological sequence of production stages, a recent property rights framework (Antràs and Chor, 2013; Alfaro et al., 2015) predicts that a choice of vertical integration is crucially based on both the position of a supplier along the chain and on the relative size of demand elasticities faced by the final producer and the supplier. We positively test whether, if final demand is sufficiently elastic (inelastic), producers of final goods integrate production stages that are more proximate to (far from) the consumers. However, this is not valid for cases of midstream parents, i.e. for producers of intermediate inputs that can integrate either backward or forward along the chain. We document that midstream are at least as common as are downstream parent companies but that existing theory neglects them. In these cases, we find that demand elasticities do not play a significant role in integration choices. Interestingly, both midstream and downstream parents tend to integrate affiliates that are more proximate in segments of a supply chain. Our findings point to a role for technological determinants that may be as important as are contracting frictions in organizing Global Value Chains.

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