Trade liberalization and domestic vertical integration : Evidence from China

Qing LIU, Larry D. QIU, Chaoqun ZHAN

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

Abstract

In this study we examine the effects of trade liberalization on domestic backward vertical integration in which a domestic upstream firm (target) is acquired by a domestic downstream firm. We first build a relationship-specific investment model to guide and provide insights to our empirical work. Then we take China's accession to the WTO as a quasi-natural experiment for trade liberalization to test the theoretical predictions. Consistent with the model, we find that a decrease in tariffs on the target industry's outputs reduces vertical integrations, but a decrease in tariffs on the target industry's inputs increases vertical integrations. The findings are robust to various specifications of the empirical model and measurements of the variables. We further show that underinvestment problem is an important mechanism to understanding the effects of tariff reductions on firms' organizational choices.

Original languageEnglish
Article number103250
JournalJournal of International Economics
Volume121
Early online date24 Aug 2019
DOIs
Publication statusE-pub ahead of print - 24 Aug 2019

Fingerprint

Vertical integration
Trade liberalization
China
Tariffs
Domestic firms
Industry
Natural experiment
Prediction
Relationship-specific investments
Underinvestment
Accessions
Empirical model

Keywords

  • Outsourcing
  • Trade liberalization
  • Vertical integration

Cite this

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title = "Trade liberalization and domestic vertical integration : Evidence from China",
abstract = "In this study we examine the effects of trade liberalization on domestic backward vertical integration in which a domestic upstream firm (target) is acquired by a domestic downstream firm. We first build a relationship-specific investment model to guide and provide insights to our empirical work. Then we take China's accession to the WTO as a quasi-natural experiment for trade liberalization to test the theoretical predictions. Consistent with the model, we find that a decrease in tariffs on the target industry's outputs reduces vertical integrations, but a decrease in tariffs on the target industry's inputs increases vertical integrations. The findings are robust to various specifications of the empirical model and measurements of the variables. We further show that underinvestment problem is an important mechanism to understanding the effects of tariff reductions on firms' organizational choices.",
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Trade liberalization and domestic vertical integration : Evidence from China. / LIU, Qing; QIU, Larry D.; ZHAN, Chaoqun.

In: Journal of International Economics, Vol. 121, 103250, 01.11.2019.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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T1 - Trade liberalization and domestic vertical integration : Evidence from China

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AU - QIU, Larry D.

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N2 - In this study we examine the effects of trade liberalization on domestic backward vertical integration in which a domestic upstream firm (target) is acquired by a domestic downstream firm. We first build a relationship-specific investment model to guide and provide insights to our empirical work. Then we take China's accession to the WTO as a quasi-natural experiment for trade liberalization to test the theoretical predictions. Consistent with the model, we find that a decrease in tariffs on the target industry's outputs reduces vertical integrations, but a decrease in tariffs on the target industry's inputs increases vertical integrations. The findings are robust to various specifications of the empirical model and measurements of the variables. We further show that underinvestment problem is an important mechanism to understanding the effects of tariff reductions on firms' organizational choices.

AB - In this study we examine the effects of trade liberalization on domestic backward vertical integration in which a domestic upstream firm (target) is acquired by a domestic downstream firm. We first build a relationship-specific investment model to guide and provide insights to our empirical work. Then we take China's accession to the WTO as a quasi-natural experiment for trade liberalization to test the theoretical predictions. Consistent with the model, we find that a decrease in tariffs on the target industry's outputs reduces vertical integrations, but a decrease in tariffs on the target industry's inputs increases vertical integrations. The findings are robust to various specifications of the empirical model and measurements of the variables. We further show that underinvestment problem is an important mechanism to understanding the effects of tariff reductions on firms' organizational choices.

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