Vertical integration and innovation

Xingyi Liu

International Journal of Industrial Organization, 2016, vol. 47, issue C, 88-120

Abstract: Innovation is a driving force for most industries, where it moreover affects many stages of the vertical chain. We study the impact of vertical integration on innovation in an industry where firms need to undertake risky R&D investments at both production and distribution stages. Vertical integration brings better coordination within the integrated firm, which boosts its investment incentive at both upstream and downstream levels. However, it is only mutually beneficial for firms to integrate when both upstream and downstream innovations are important. When innovation is irrelevant at one level, firms favor instead vertical separation. The analysis provides insights for the wave of mergers and R&D outsourcing observed in the pharmaceutical industry and other vertically related industries.

Keywords: Vertical integration; Innovation; Complementarity (search for similar items in EconPapers)
JEL-codes: D21 L11 L13 L22 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:47:y:2016:i:c:p:88-120

DOI: 10.1016/j.ijindorg.2016.02.002

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