The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China

Ana Fernandes and Heiwai Tang

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Using detailed product-level export data for China and a variant of the Antràs and Helpman (2004) model that includes investments in component search, we examine the sectoral determinants of foreign direct investment (FDI) versus foreign outsourcing in export processing trade. We exploit the coexistence of two regulatory export processing regimes in China, which specify who owns and controls the imported components for export processing. We find that in the regime that Chinese plants own the imported components, the share of exports from vertically integrated plants is increasing in the intensity of headquarter inputs across sectors, and is decreasing in the contractibility of inputs. These results are consistent with the property- rights theory of intra-firm trade. However, in the regime that foreign firms own the imported components, no significant relationship is found between the prevalence of vertical integration, headquarter intensity and input contractibility across sectors. The positive relationship between productivity dispersion and the export share of integrated plants across sectors, as suggested by the existing literature, is found only in the regime that foreign firms own the imported components. These results are consistent with our model, which considers ownership of imported components as an alternative to asset ownership to alleviate the hold-up problem by the export-processing plant.

Keywords: Intrafirm trade; vertical integration; export processing; outsourcing (search for similar items in EconPapers)
JEL-codes: F14 F23 L14 L33 (search for similar items in EconPapers)
Date: 2010-05
New Economics Papers: this item is included in nep-int and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Determinants of vertical integration in export processing: Theory and evidence from China (2012)
Working Paper: The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China (2010)
Working Paper: The determinants of vertical integration in export processing: theory and evidence from China (2010)
Working Paper: The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China (2010)
Working Paper: The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China (2010)
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