Contract Enforcement and Vertical Integration: Evidence from China's Manufacturing Firms

34 Pages Posted: 30 Oct 2009

See all articles by Julan Du

Julan Du

The Chinese University of Hong Kong (CUHK) - Department of Economics

Yi Lu

School of Business, University of Hong Kong

Zhigang Tao

The University of Hong Kong - School of Business

Date Written: July 2009

Abstract

It has been taken for granted in the literature on the determinants of vertical integration that the effectiveness of contract enforcement is guaranteed, which is far from true even in some developed countries. In this paper, using a World Bank data set of manufacturing firms in China, we investigate how the variations in the effectiveness of contract enforcement across China's cities affect the degree of vertical integration. We find that weaker contract enforcement causes firms to be more vertically integrated, and that firms with greater reliance on external environment are more vertically integrated in cities with poorer contract enforcement.

Keywords: Contract Enforcement, Vertical Integration, Legal Origin, Transaction Cost Economics

JEL Classification: L23, D23, P26, K12

Suggested Citation

Du, Julan and Lu, Yi and Tao, Zhigang, Contract Enforcement and Vertical Integration: Evidence from China's Manufacturing Firms (July 2009). Available at SSRN: https://ssrn.com/abstract=1495619 or http://dx.doi.org/10.2139/ssrn.1495619

Julan Du

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Yi Lu (Contact Author)

School of Business, University of Hong Kong ( email )

Rm 730, Meng Wah Complex
Pokfulam Road
Hong Kong
Hong Kong
(852) 2241-5245 (Phone)
(852) 2858-5614 (Fax)

HOME PAGE: http://www.fbe.hku.hk/~luyi

Zhigang Tao

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China
(852) 2857-8223 (Phone)
(852) 2858-5614 (Fax)

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