Vertical organization of production and firm growth behavior

Many industries are characterized by a marked heterogeneity in vertical boundaries among their firms: some firms are vertically integrated in the production of inputs while others adopt disintegration strategies. This paper empirically explores if different vertical organizational forms are associated with unlike growth “behaviors” within the same industry. To this end, an econometric analysis is conducted over a sample of around 500 Italian machine tool (MT) builders for the period 1998-2007. Ceteris paribus, vertically integrated firms show a distribution of growth rates with a higher number of episodes of “moderate” growth, and this is true in case of both output expansion and contraction. Adjustment costs, organizational slacks, a better coordination along the production chain and a more effective handling of changes in customers’ needs may all concur to explain their more “moderate” growth profile with respect to disintegrated firms. This work provides insight into the output dynamics in a mature industry in which both vertically integrated and dis-integrated firms coexist.