Vertical Integration and Investor Protection in Developing Countries

No 2009.86, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The industrial organization of developing countries is characterized by the pervasive use of subcontracting arrangements among small, financially constrained firms. This paper asks whether vertical integration relaxes those financial constraints. It shows that vertical integration trades off the benefits of joint liability against the costs of rendering the supply chain more opaque to external investors. In contrast to the commonly held view that pervasive input and capital market imperfections are conducive to vertical integration, the model predicts that the motives for vertical integration are not necessarily higher in developing countries. In particular, vertical integration is more likely to arise at intermediate levels of investor protection and better contract enforcement with suppliers reduces vertical integration only if financial markets are sufficiently developed. Evidence supporting both predictions is discussed.

Keywords: Vertical Integration; Industrial Development; Financial Constraints; Joint Liability; Trade Credit; Community-based Industries (search for similar items in EconPapers)
JEL-codes: D23 G30 L22 O12 O16 (search for similar items in EconPapers)
Date: 2009-10
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Related works:
Journal Article: Vertical integration and investor protection in developing countries (2010)
Working Paper: Vertical Integration and Investor Protection in Developing Countries (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2009.86

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