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Institutional determinants of vertical integration in China

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  • Fan, Joseph P.H.
  • Huang, Jun
  • Morck, Randall
  • Yeung, Bernard

Abstract

Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. We report that Chinese firms in the 2000's are more vertically integrated than the U.S. firms in the 1990s. We find that vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. Further, firms led by insiders with political connection are more likely to be vertically integrated. Finally, vertical integration among politically unconnected firms is associated with elevated per capita GDP level and growth, while vertical integration among politically connected firms is unrelated to local economy performance.

Suggested Citation

  • Fan, Joseph P.H. & Huang, Jun & Morck, Randall & Yeung, Bernard, 2017. "Institutional determinants of vertical integration in China," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 524-539.
    • Handle: RePEc:eee:corfin:v:44:y:2017:i:c:p:524-539
    DOI: 10.1016/j.jcorpfin.2014.05.013
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    More about this item

    Keywords

    Vertical integration; Rent seeking; Institutional development; Government;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • P14 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Property Rights
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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