Pitfalls in Private and Social Incentives of Vertical Cross-border Integration and Disintegration

Gianpaolo Rossini

Review of International Economics, 2007, vol. 15, issue 5, pages 932-947

Abstract: Production increasingly takes place on a cross-border basis along two patterns. Either a vertically integrated (VI) multinational firm (MNF) spreads the production sequence over many countries or vertically disintegrated (VD) firms operate independently in distinct stages and countries. On the private side, the decrease of transport costs expands VD, due to incentives alternatively in the upstream (U) and the downstream (D) sections of production. With VD the benefits are disseminated over many countries. With VI they are skewed towards a single area. Then, some countries prefer cross-border VD. In an international duopoly setting, with vertical restraints due to competition or trade policies, VD becomes the privately preferred mode and provides further ground for the wave of international fragmentation. Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd.

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