Lock-In, Vertical Integration, and Investment: The Case of Eastern European Firms

Liliane Giardino-Karlinger

Review of Economics and Institutions, 2016, vol. 7, issue 1

Abstract: A key prediction of transaction cost economics (TCE) is that the presence of relationship-specific assets increases the likelihood of vertical integration whenever contracts are incomplete. I explore a firm-level data set on Eastern European and Central Asian firms, the BEEPS 2005 Survey provided by the EBRD and World Bank, to test this prediction. I measure lock-in by supplier substitution, and find the TCE prediction confirmed in the data. Testing whether the determinants of vertical integration also drive investment decisions, I find that lock-in raises the probability to engage in R&D, at least on the subsample of fully privately owned, non-exporting firms.

Keywords: vertical integration; supplier substitution; transition countries (search for similar items in EconPapers)
JEL-codes: L14 L23 L25 (search for similar items in EconPapers)
Date: 2016
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