Backward versus forward integration of firms in global value chains

Abstract

This paper seeks to understand the forces determining the pattern of asset ownership in global value chains. We augment a standard model of vertical integration rooted in the property-rights theory to account for fixed integration costs and derive four channels of influence for the cross-country and cross-sector pattern of asset ownership: the relative investment intensity of sectors and countries; the relative density of markets; the relative reliance on and importance of supplying and producing country-sectors; and the relative importance of fixed integration costs. We confirm the relevance of these determinants for the observed pattern of asset ownership in a large panel of worldwide directed ownership linkages.