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

Sponsor: Development Economics and Chief Economist (DEC)

SpeakerAna Fernandes, University of Sussex, jointly with Heiwai Tang, Tufts University

Abstract: Using detailed product-level export data for China and a variant of the Antràs and Helpman (2004) model that includes investments in component search, we examine the sectoral
determinants of foreign direct investment (FDI) versus foreign outsourcing in export processing
trade. We exploit the coexistence of two regulatory export processing regimes in China, which
specify who owns and controls the imported components for export processing. We find that
in the regime that Chinese plants own the imported components, 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 the property-
rights theory of intra-firm trade. However, in the regime that foreign firms own the imported
components, no significant relationship is found between the prevalence of vertical integration,
headquarter intensity and input contractibility across sectors. The positive relationship between
productivity dispersion and the export share of integrated plants across sectors, as suggested
by the existing literature, is found only in the regime that foreign firms own the imported
components. These results are consistent with our model, which considers ownership of imported components as an alternative to asset ownership to alleviate the hold-up problem by the
export-processing plant.

For Information: Yasmin D Souza

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