The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China

Ana Fernandes and Heiwai Tang

No 52010, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This paper uses detailed product-level export data for China and proposes an extension of the Antrˆjs and Helpman (2004) framework that includes investments in component search to investigate the determinants of foreign direct investment (FDI) versus foreign outsourcing. We exploit the coexistence of two regulatory trade regimes for export-processing in China, pure-assembly and import-and-assembly. We find that if Chinese plants import materials and assemble them, the share of exports from vertically integrated plants is increasing in the intensity of headquarter inputs across sectors, and is decreasing in the contractibility of inputs. These results are consistent with existing theories. However, if Chinese plants engage in pure-assembly, under which regime ownership over the materials shipped to China remains with the foreign firm, we find little support for the existing theories on FDI and outsourcing that focus on contract incompleteness and the relative importance of relationship-specific investments. We also find that more dispersed firm productivity in a sector is associated with a larger export share of integrated plants under pure-assembly but not under import-and-assembly. These results are consistent with the predictions of our model, which focuses on ownership of imported components as an alternative to asset ownership for alleviating the hold-up problem by the export-processing plant.

Keywords: Intrafirm Trade; Vertical Integration; Export Processing; Outsourcing (search for similar items in EconPapers)
JEL-codes: F14 F23 L14 L33 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2010-03
New Economics Papers: this item is included in nep-cna and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Determinants of vertical integration in export processing: Theory and evidence from China (2012)
Working Paper: The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China (2010)
Working Paper: The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China (2010)
Working Paper: The determinants of vertical integration in export processing: theory and evidence from China (2010)
Working Paper: The Determinants of Vertical Integration in Export Processing: Theory and Evidence from China (2010)
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