Backward and Forward Integration Along Global Value Chains
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Backward and Forward Integration Along Global Value Chains Davide Del Prete1 · Armando Rungi2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Both backward (upstream) and forward (downstream) vertical integration strategies shape the organization of global value chains (GVCs). Yet, many studies make the unrealistic assumption that integration decisions are binary and one-directional. That is, for each production stage, companies make the integration decision only once, and this can be either backward or forward but not in both directions. The aim of this paper is to analyze the firm-level organization of GVCs when both vertical integration decisions are taken into account. Exploiting a global sample of more than 1.4 million firms, we first document how midstream parents, which actually integrate on both directions along the chain, are at least as common as downstream and upstream parents. We then find that parent companies prefer to integrate production stages with a relatively low elasticity of substitution and with a technological proximity on the supply chain. Finally, we provide evidence that more than one subsidiary in a given location can perform the same production stage. Keywords Global value chains · Vertical integration · Property rights theory · Multinational enterprises · Downstreamness · Corporate boundaries JEL Classification F14 · F23 · D23 · G34 · L20
* Davide Del Prete [email protected] Armando Rungi [email protected] 1
Department of Business and Economics, University of Naples Parthenope, Via Generale Parisi 13, 80132 Naples, Italy
2
Laboratory for the Analysis of Complex Economic Systems, IMT School for Advanced Studies – Lucca, Piazza San Francesco 19, 55100 Lucca, Italy
13
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D. Del Prete, A. Rungi
1 Introduction In 1871, Continental AG was founded in Germany and started its business as a rubber manufacturer. Nowadays, it is one of the largest manufacturers of tires; but, since its foundation, it has extended its range of activities including both backward (upstream) and forward (downstream) tasks along the automotive chain. For example, Continental AG acquired the segment of brakes and chassis in 1998 from ITT Inc. It concluded a deal with Motorola in 2006 to take over the segment of automotive electronic components ant it acquired the VDO brand by Siemens for powertrain and fuel injection systems in 2007. Later, in 2015, the company moved further upstream after the acquisition of the US firm Vejance Technologies, which is a supplier of engineered rubber products. Consider also Acer: the Taiwanese company started in 1976 as an electronic components importer and became among the top producer of PCs in 2 decades. Upstream, in 1989 Acer partnered with Texas Instruments to produce semiconductors; and in 1998 it partnered with TI for additional electronic components. Downstream, Acer’s regional business units took over local assembly, and it started to develop capabilities in distribution activities (Bartlett an
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