Abstract
In this study we examine the effects of trade liberalization on domestic backward vertical integration in which a domestic upstream firm (target) is acquired by a domestic downstream firm. We first build a relationship-specific investment model to guide and provide insights to our empirical work. Then we take China's accession to the WTO as a quasi-natural experiment for trade liberalization to test the theoretical predictions. Consistent with the model, we find that a decrease in tariffs on the target industry's outputs reduces vertical integrations, but a decrease in tariffs on the target industry's inputs increases vertical integrations. The findings are robust to various specifications of the empirical model and measurements of the variables. We further show that underinvestment problem is an important mechanism to understanding the effects of tariff reductions on firms' organizational choices.
Original language | English |
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Article number | 103250 |
Journal | Journal of International Economics |
Volume | 121 |
Early online date | Aug 2019 |
DOIs | |
Publication status | Published - Nov 2019 |
Scopus Subject Areas
- Finance
- Economics and Econometrics
User-Defined Keywords
- Trade liberalization
- Vertical integration
- Outsourcing