Trade Liberalization and Domestic Vertical Integration: Evidence from China

Posted: 18 May 2021

See all articles by Qing Liu

Qing Liu

Renmin University of China

Larry D. Qiu

The University of Hong Kong - Faculty of Business and Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Chaoqun Zhan

Independent

Date Written: August 9, 2019

Abstract

In this study we examine the effects of trade liberalization on domestic backward vertical integration in which a domestic upstream firm (target) is acquired by a domestic downstream firm. We first build a relationship-specific investment model to guide and provide insights to our empirical work. Then we take China's accession to the WTO as a quasi-natural experiment for trade liberalization to test the theoretical predictions. Consistent with the model, we find that a decrease in tariffs on the target industry's outputs reduces vertical integrations, but a decrease in tariffs on the target industry's inputs increases vertical integrations. The findings are robust to various specifications of the empirical model and measurements of the variables. We further show that underinvestment problem is an important mechanism to understanding the effects of tariff reductions on firms' organizational choices.

Keywords: Trade Liberalization, Vertical Integration, Outsourcing

JEL Classification: F13, F15, L14, L22

Suggested Citation

Liu, Qing and Qiu, Larry Dongxiao and Zhan, Chaoqun, Trade Liberalization and Domestic Vertical Integration: Evidence from China (August 9, 2019). Journal of International Economics, Vol. 121, 2019, Available at SSRN: https://ssrn.com/abstract=3846035

Qing Liu (Contact Author)

Renmin University of China ( email )

Larry Dongxiao Qiu

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

School of Economics and Finance
University of Hong Kong
Pokfulam
Hong Kong

HOME PAGE: http://www.bm.ust.hk/~larryqiu/

Chaoqun Zhan

Independent ( email )

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