Working Paper: CEPR ID: DP13321
Authors: Claudia Steinwender; Giuseppe Berlingieri; Frank Pisch
Abstract: We study whether and how the technological importance of an input – measured by its cost share – is related to the decision of whether to “make” or “buy” that input. Using detailed French international trade data and an instrumental variable approach based on self-constructed input-output tables, we show that French multinationals vertically integrate those inputs that have high cost shares. A stylized incomplete contracting model with both ex ante and ex post inefficiencies explains why: technologically more important inputs are “made” when transaction cost economics type forces (TCE; favoring integration) overpower property rights type forces (PRT; favoring outsourcing). Additional results related to the contracting environment and headquarters intensity consistent with our theoretical framework showthat both TCE and PRT type forces are needed to fully explain the empirical patterns in the data.
Keywords: Vertical Integration; Supply Chains; Direct Requirements; Input-Output Relationship; Intra-firm Trade
JEL Codes: F10; F14; L16; L23; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TCE forces overpowering PRT forces (D74) | Vertical integration of inputs with high cost shares (L14) |
| Integration of more important inputs (C43) | Greater inefficiencies caused by supplier haggling or miscoordination (L14) |
| Technological importance of inputs (cost shares) (O33) | Sourcing decision (make or buy) (L23) |
| High cost shares (G19) | Likelihood of sourcing from affiliated suppliers (L14) |
| Technological importance of inputs (O33) | Sourcing from affiliated parties (L14) |
| Input at the 75th percentile of cost share distribution (D33) | Sourced in-house compared to one at the 25th percentile (J39) |