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Why Do Firms Own Production Chains?

Ali Hortacsu and Chad Syverson

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: Many firms own links of production chains--i.e., they own both upstream and downstream plants in vertically linked industries. We use broad-based yet detailed data from the economy’s goods-producing sectors to investigate the reasons for such vertical ownership. It does not appear that vertical ownership is usually used to facilitate transfers of goods along the production chain, as is often presumed. Shipments from firms’ upstream units to their downstream units are surprisingly low, relative to both the firms’ total upstream production and their downstream needs. Roughly one-third of upstream plants report no shipments to their firms’ downstream units. Half ship less than three percent of their output internally. We do find that manufacturing plants in vertical ownership structures have high measures of “type” (productivity, size, and capital intensity). These patterns primarily reflect selective sorting of high plant types into large firms; once we account for firm size, vertical structure per se matters much less. We propose an alternative explanation for vertical ownership that is consistent with these results. Namely, that rather than moderating goods transfers down production chains, it instead allows more efficient transfers of intangible inputs (e.g., managerial oversight) within the firm. We document some suggestive evidence of this mechanism.

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Date: 2009-09
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https://www2.census.gov/ces/wp/2009/CES-WP-09-31.pdf First version, 2009 (application/pdf)

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Working Paper: Why Do Firms Own Production Chains? (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:09-31

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