How do firms respond to competition? Evidence from vertical integration

Han Sun and Man Wang

International Review of Financial Analysis, 2025, vol. 105, issue C

Abstract: This paper studies whether and how reducing governmental anti-competitive interventions shapes firms' behavior. Using the implementation of the fair competition review system (FCRS) in China as a quasi-natural experiment, which exogenously changes the firms' competitive environment by reducing governmental anti-competitive interventions, we find a significant increase in vertical integration following the FCRS implementation. We further test the mechanisms through which the FCRS affects firms' vertical integration and find that it increases market competition, thereby making vertical integration more desirable. Cross-sectional analyses indicate that vertical integration is more likely to increase when its benefits are higher or its costs are lower. Specifically, this effect is more pronounced among firms with higher industry entry threats, demand risks, lower market positions, greater internal coordination effectiveness, and lower managerial complexity. Our findings suggest that increased local market competition makes vertical integration a desirable strategy for firms seeking a competitive edge in emerging markets.

Keywords: Fair competition review system; Governmental anti-competitive interventions; Vertical integration; Competitive environment (search for similar items in EconPapers)
JEL-codes: K21 L14 L22 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:105:y:2025:i:c:s1057521925005435

DOI: 10.1016/j.irfa.2025.104456

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