Do Prices Determine Vertical Integration Tables

Table 1: Tariffs and vertical integration Tariffk,c (1) 0.0203*** (0.0061) Domesticf Tariffk,c x Domesticf (2) 0.0034 (0.0088) -0.0926*** (0.0108) 0.0214*** (0.0054) Import-competingk,c (3) 0.0160** (0.0063) (4) 0.0042 (0.0080) (5) 0.0202*** (0.0600) (6) 0.0035 (0.0086) -0.0923*** (0.0109) 0.0212*** (0.0054) -0.0362*** (0.0135) 0.0155** (0.0070) Tariffk,c x Import-competingk,c MFN sharek,c (7) 0.1600*** (0.0061) -0.0351*** (0.0134) 0.0148** (0.0070) -0.0237 (0.0190) 0.0245*** (0.0074) Tariffk,c x MFN sharek,c (8) 0.005 (0.0081) -0.0215 (0.0190) 0.0230*** (0.0075) Capital Intensityk x Financial Developmentc 0.0322** (0.0142) 0.0321** (0.0144) 0.0297** (0.0148) 0.0293** (0.0145) Capital Intensityk x Legal Qualityc -0.0833 (0.0564) -0.0823 (0.0573) -0.0774 (0.0589) -0.0735 (0.0572) 196,586 386 0.117 YES 196,586 386 0.119 YES 196,586 386 0.117 YES 196,586 386 0.117 YES # Observations # Sectors R2 Sector and Country Fixed Effects 196,586 386 0.117 YES 196,586 386 0.119 YES 196,586 386 0.117 YES 196,586 386 0.117 YES Notes: Robust standard errors clustered at the sector-country level in parentheses denoting *** 1%, **5%, and *10% significance. The sample includes firms ≥ 20 employees in the manufacturing sector, excluding multinationals. Dependent variable: log of one plus Vf,k,c , the vertical integration index of firm f , with primary sector k, located in country c. Explanatory variables are in logs, except MFN tariffs, where we use log of one plus the tariff. The variable Tariffk,c is the MFN tariff imposed by country c in sector k. The dummy variables Domesticf and Import-competingk,c are alternative ways to capture firms that only sell in the domestic market. Domesticf identifies firms that do not export. Import-competingk,c identifies the top 25 percent most import-competing sectors, as measured by a country’s total imports/exports. MFN sharek,c measures the fraction of imports of good k by country c that are subject to the MFN tariff, i.e. do not originate from countries with which country c has a regional trade agreement. Capital Intensity k is the total capital expenditures divided by value added. Financial Development c measures private credit by deposit money banks and other financial institutions as a fraction of GDP. The variable Legal Quality c proxies for the quality of a country’s institutions Table 2: Tariffs and vertical integration, competitive industries Tariffk,c Capital Intensityk x Financial Developmentc (1) (2) Homogeneous sectors, many firms 0.0290** 0.0292** (0.0117) (0.0117) 0.0063 (0.0524) Capital Intensityk x Legal Qualityc Observations # Sectors R2 Sector and Country Fixed Effects Tariffk,c Capital Intensityk x Financial Developmentc -0.0615 (0.1950) 13,095 56 0.073 YES 13,095 56 0.073 YES Panel B: (1) (2) Homogeneous sectors, many firms 0.0257*** 0.0248*** (0.0083) (0.0084) 0.0216 (0.0248) Capital Intensityk x Legal Qualityc Observations # Sectors R2 Sector and Country Fixed Effects Panel A: Homogeneous sectors based on Rauch (1999) (3) (4) (5) (6) (7) (8) Homogeneous sectors, Homogeneous sectors, Homogeneous sectors, many firms, low tariffs many firms, foreign presence many firms, low concentration 0.0380** 0.0381** 0.0316** 0.0315** 0.0747*** 0.0982*** (0.0149) (0.0154) (0.0145) (0.0144) (0.0228) (0.0216) 0.0203 - 0.0035 0.68 (0.0436) (0.4420) (0.1610) -0.2330 (0.1440) 78,437 337 0.107 YES 1.027 (0.7290) 11,279 11,279 10,918 10,918 8,539 8,539 54 54 53 53 37 37 0.052 0.052 0.068 0.068 0.047 0.047 YES YES YES YES YES YES Homogeneous sectors based on Broda, Greenfield and Weinstein (2006) (3) (4) (5) (6) (7) (8) Homogeneous sectors, Homogeneous sectors, Homogeneous sectors, many firms, low tariffs many firms, foreign presence many firms, low concentration 0.0345*** 0.0341*** 0.0363*** 0.0363*** 0.0648*** 0.0639*** (0.0085) (0.0084) (0.0101) (0.0102) (0.0112) (0.0116) 0.0041 0.0560 -0.0267 (0.0245) (0.0367) (0.0299) -0.1240 (0.0875) 78,437 337 0.106 YES 0.0499 (0.1870) -0.0952 (0.1170) 69,823 328 0.099 YES 69,823 328 0.099 YES - 0.3018** (0.1306) 69,980 309 0.111 YES 69,980 309 0.111 YES -0.0840 (0.1400) 50,315 234 0.087 YES 50,315 234 0.087 YES Notes: Robust standard errors clustered at the sector-country level are in parentheses; denoting *** 1%, **5%, and *10% significance. The sample includes firms ≥ 20 employment in the manufacturing sector, excluding multinationals. In all columns, the sample is restricted to industries in which at least 20 domestic firms operate in a given country, and in which products are homogeneous. In Panel A, homogeneous sectors are defined using the variable Homogeneous1k based on Rauch (1999); in Panel B, we use instead the variable Homogeneous2 k,c based on Broda, Greenfield and Weinstein (2006). In columns (3)-(8), we impose further restrictions: columns (3)-(4) include only sectors in which Tariffk,c < 10%; columns (5)-(6) include only sectors in which some foreign firms operate in the domestic market; in columns (7)-(8), the sample is restricted to sectors in which Herfindahlk,c ≤ 0.1. Dependent variable: log of one plus Vf,k,c , the vertical integration index of firm f , with primary sector k, located in country c. Explanatory variables are in logs, with the exception of MFN tariffs, where we use log of one plus the tariff. Tariffk,c is the MFN tariff imposed by country c in sector k. Capital Intensity k is the total capital expenditures divided by value added. Financial Development c measures private credit by deposit money banks and other financial institutions as a fraction of GDP. The variable Legal Quality c proxies for the quality of a country’s institutions. Table 3: Tariffs and vertical integration, controlling for possible omitted variables Tariffk,c (1) 0.0203*** (0.0061) Capital Intensityk x Financial Developmentc Capital Intensityk x Legal Qualityc (2) 0.0202*** (0.0060) 0.0322** (0.0142) (3) 0.0203*** (0.0074) 0.0333** (0.0161) (4) 0.0190*** (0.0058) 0.0387** (0.0154) (5) 0.0214*** (0.0065) 0.0425** (0.0176) (6) 0.0210*** (0.0059) 0.0401** (0.0187) (7) 0.0212*** (0.0059) 0.0319** (0.0146) (8) 0.0198*** (0.0057) 0.0390** (0.0189) (9) 0.0183*** (0.0061) 0.0507** (0.0234) -0.0833 (0.0564) -0.0785 (0.0617) -0.100* (0.0604) -0.106 (0.0682) -0.103 (0.0711) -0.0836 (0.0577) -0.0944 ( 0.0705) -0.127 (0.0885) 0.00252 (0.0052) 0.0330** (0.0141) -0.0038 (0.0060) 0.0267*** (0.0054) 0.0464*** ( 0.0170) -0.0049 (0.0063) 0.0141 ( 0.0316) 0.0440*** (0.0111) 0.0287*** (0.0069) 178,448 386 0.125 YES 133,545 311 0.132 YES Input Tariffk,c 0.0391*** (0.0142) Export Tariffk,c Herfindahlk,c 0.0128 (0.0228) Sizef 0.0352*** (0.0075) Labor Productivityf # Observations # Sectors R2 Sector and Country Fixed Effects 196,586 386 0.117 YES 196,586 386 0.117 YES 154,915 311 0.119 YES 185,630 386 0.123 YES 146,228 311 0.125 YES 178,199 386 0.117 YES 196,586 386 0.122 YES Notes: Robust standard errors clustered at the sector-country level are in parentheses denoting *** 1%, **5%, and *10% significance. The sample includes firms ≥ 20 employment in the manufacturing sector, excluding multinationals. Dependent variable: log of one plus Vf,k,c , the vertical integration index of firm f , with primary sector k, located in country c. Explanatory variables are in logs, with the exception of output tariffs, input tariff and export tariff, where we use log of one plus the tariff. Tariffk,c is the MFN tariff imposed by country c in sector k. Capital Intensity k is the total capital expenditures divided by value added. Financial Development c measures private credit by deposit money banks and other financial institutions as a fraction of GDP. The variable Legal Quality c proxies for the quality of a country’s institutions. Import Tariffk,c is the tariff imposed by country c on inputs of good k. Export Tariffk,c is the tariff faced by firms exporting good k from country c. Herfindahlk,c is the Herfindahl index of sector k in country c. In columns (7)-(9) we report 2SLS estimates. Sizef measures firm size (instrumented with employment predicted with sector-country dummies). Labor productivityf is measured as sales per worker (instrumented with sales per worker predicted with sector-country dummies). Table 4: Tariffs and vertical integration, China’s accession to the WTO Tariffk,t (1) 0.0313*** (0.0096) Herfindahlk,t (2) 0.0356** (0.0160) -0.0040 (0.0113) Publicf,t (3) 0.0313*** (0.0096) 0.0055*** (0.0010) (4) 0.0357** (0.0160) -0.0040 (0.0113) 0.0059*** (0.0015) Change Tariffk (5) (6) (7) (8) (9) (10) 0.0364* (0.0202) 0.0459* (0.0234) -0.0371 (0.0292) 0.0364* (0.0203) 0.0364* (0.0205) 0.0456* (0.0234) -0.0307 (0.0297) -0.0351 (0.0320) 0.0451* (0.0230) -0.0406 (0.0301) Change Herfindahlk Change Publicf 0.0007 (0.0135) Privatizationk # Observations # Sectors R2 Sector Fixed Effects Time Fixed Effects -0.0351 (0.0798) 28,928 88 0.921 YES YES 13,682 88 0.902 YES YES 28,928 88 0.921 YES YES 13,682 88 0.902 YES YES 145 88 0.042 NO YES 75 75 0.087 NO YES 145 88 0.042 NO YES 145 88 0.042 NO YES 0.0574 (0.1180) 75 75 0.104 NO YES 75 75 0.089 NO YES Notes: Robust standard errors clustered at the sector level in parentheses denoting *** 1%, **5%, and *10% significance. In columns (1)- (4), the dependent variable is the log of one plus Vf,k , the vertical integration index of firm f , with primary sector k; in columns (5)-(10), it is the change in the log of one plus the vertical integration index between 1999 (pre accession) and 2007 (post accession). The sample includes Chinese firms observed in 1999 and/or 2007 with ≥ 20 employees in the manufacturing sector, excluding multinationals. Tariffk is the log of (one plus) MFN tariff applied by China in sector k. Publicf is a firm-level dummy for public ownership, Privatizationk is a sector-level measure of privatization and Herfindahlk is the Herfindahl index for sector k. Table 5: Trade policy and organizational convergence Panel A: Tariff differences (1) 0.0089*** (0.0034) Capital Intensityk x Difference Financial Developmentc,c0 (2) 0.0086** (0.0037) 0.0020 (0.0066) Capital Intensityk x Difference Legal Qualityk,c,c0 0.0419*** (0.0062) Difference Tariffsk,c,c0 # Observations 212,770 171,908 # Country pairs 80 80 R2 0.164 0.164 Sector and Country-pair Fixed Effects YES YES Panel B: Regional Trade Agreements (1) -0.0921*** (0.0235) RTAc,c0 Customs Unionc,c0 Free Trade Areac,c0 (2) (3) -0.185*** (0.0376) -0.0404 (0.0266) -0.0760* (0.046) 0.0203 (0.0264) Distancec,c0 0.0188 (0.0146) -0.196*** (0.0754) -0.119*** (0.0313) 0.0663 (0.0421) 0.0389*** (0.0087) Contiguityc,c0 Common Languagec,c0 Colonial Relationshipc,c0 Difference GDPc,c0 # Observations # Country pairs R2 Sector and Country Fixed Effects 299,649 101 0.109 YES 299,649 101 0.109 YES 299,649 101 0.111 YES Notes: Robust standard errors clustered at the country-pair level in parentheses denoting *** 1%, **5%, and *10% significance. Dependent variable: log of (one plus) the absolute difference between countries c and c0 in the estimated vertical integration index of firms with primary sector k. The variable Difference Tariffsk,c,c0 is the difference between the MFN tariff imposed by country c and c0 in sector k. Capital Intensity k is the total capital expenditures divided by value added. Difference Financial Development cc0 measures differences in private credit by deposit money banks and other financial institutions as a fraction of GDP. The variable Difference in Legal Quality c proxies differences in the quality of institutions across between two countries. The variables Contiguityc,c0 , Colonial Relationshipc,c0 , Common Languagec,c0 and Difference GDPc,c0 capture bilateral geographical, cultural and economic linkages. 38 Appendix Table A-1: Main sample WB code ALB ARG AUS AUT BEL BEN BFA BGD BGR BOL BRA CAN CHE CHL COL CRI CZE DEU DNK ECU ESP FIN FRA GAB GBR GHA GRC GTM HND HUN IDN IND IRL ISR ITA JAM JOR JPN KEN KOR Freq. 4 998 5,079 1,464 928 4 8 6 360 55 5,594 7,469 1,150 454 550 176 1,736 19,302 425 183 2,322 448 8,965 3 6,622 81 2,231 93 77 2,346 233 2,592 587 1,538 8,426 43 148 34,441 134 3,060 Percent Cum. WB code 0.00 0.51 2.58 0.74 0.47 0.00 0.00 0.00 0.18 0.03 2.85 3.80 0.58 0.23 0.28 0.09 0.88 9.82 0.22 0.09 1.18 0.23 4.56 0.00 3.37 0.04 1.13 0.05 0.04 1.19 0.12 1.32 0.30 0.78 4.29 0.02 0.08 17.52 0.07 1.56 0.00 0.51 3.09 3.84 4.31 4.31 4.32 4.32 4.50 4.53 7.38 11.18 11.76 11.99 12.27 12.36 13.24 23.06 23.28 23.37 24.55 24.78 29.34 29.34 32.71 32.75 33.89 33.93 33.97 35.17 35.29 36.60 36.90 37.68 41.97 41.99 42.07 59.59 59.66 61.21 MAR MDG MEX MLI MOZ MUS MWI MYS NER NIC NLD NOR NZL OMN PAK PER PHL PNG POL PRT PRY ROM RWA SAU SEN SGP SLV SWE TGO THA TTO TUN TUR TZA UGA URY USA VEN ZAF ZMB Total Freq. Percent Cum. 603 18 2,641 13 16 46 2 3,101 1 21 676 847 959 67 4 888 351 4 446 5,433 50 614 2 314 47 790 129 689 4 507 79 991 2,557 24 37 114 52,917 231 1 17 196,586 0.31 0.01 1.34 0.01 0.01 0.02 0.00 1.58 0.00 0.01 0.34 0.43 0.49 0.03 0.00 0.45 0.18 0.00 0.23 2.76 0.03 0.31 0.00 0.16 0.02 0.40 0.07 0.35 0.00 0.26 0.04 0.50 1.30 0.01 0.02 0.06 26.92 0.12 0.00 0.01 100.00 61.52 61.53 62.87 62.88 62.89 62.91 62.91 64.49 64.49 64.50 64.84 65.27 65.76 65.80 65.80 66.25 66.43 66.43 66.66 69.42 69.45 69.76 69.76 69.92 69.94 70.35 70.41 70.76 70.76 71.02 71.06 71.57 72.87 72.88 72.90 72.96 99.87 99.99 99.99 100.00 Notes: The sample includes all firms in the 2004 WorldBase dataset by Dun & Bradstreet, which are located in WTO member countries and have primary activities in manufacturing sectors. It excludes firms with less than 20 employees and multinationals. 39 Table A-2: Summary statistics Sample Plants Connected plants Multi-plant firms Single-plant firms Firms Country variables Vertical Integration Indexf Sizef Labor productivityf Domesticf Import-competingk,c Tariffk,c Input Tariffk,c Export Tariffk,c MFN Sharek,c Herfindahlk,c Homogeneous1k Homogeneous2k,c Capital Intensityk Financial Developmentc Legal Qualityc Country-pair variables Difference Ver. Int. Indexk,c,c0 Regional Trade Agreementc,c0 Free Trade Agreementc,c0 Customs Unionc,c0 Distancec,c0 Contiguityc,c0 Colonial Relationshipc,c0 Common Languagec,c0 Difference GDPc,c0 Median 0.044 38.000 11.506 0 0.702 2.480 2.546 5.654 0.564 0.053 0 0 -2.857 0.332 0.545 Median -1.593 0.000 0.000 0.000 9.017 0.000 0.000 0.000 0.450 Mean 0.063 98.936 11.446 0.233 0.705 4.849 3.994 6.611 0.545 0.132 0.081 0.491 -2.902 0.554 0.583 Mean -1.707 0.263 0.148 0.115 8.629 0.041 0.020 0.122 0.201 Std. Dev. 0.063 472.395 1.082 0.423 0.571 7.253 4.954 5.039 0.351 0.188 0.273 0.499 0.458 0.479 0.209 Std. Dev. 1.614 0.440 0.355 0.319 0.965 0.139 0.178 0.328 1.812 N 225,212 29,214 6,830 189,756 196,586 N 196,586 196,586 178,448 196,586 196,586 196,586 154,915 185,630 196,586 178,199 196,586 173,587 387 80 80 N 299,649 299,649 299,649 299,649 299,649 299,649 299,649 299,649 299,649 Sources: Vertical Integration Indexf , Size f , Labor Productivity f , Domestic f and Herfindahl k,c constructed using plant-level data from 2004 WorldBase, Dun & Bradstreet. Sample includes manufacturing firms with at least 20 employees and excludes multinationals. Tariff k,c from the World Integrated Trade Solution (WITS); Input Tariff k,c , Export Tariff k,c , and MFN Share k,c constructed using data from WITS and the UN Comtrade database. Import-Competing k,c constructed using data from Comtrade. Information on regional trade agreements from the WTO. Homogeneous1 k from Rauch (1999), Homogeneous2 k,c constructed using data from Broda, Greenfield and Weinstein (2006). Capital Intensity k from NBER-CES manufacturing industry database. Financial Development c from Beck, Demigurc-Kunt and Levine (2006). Legal Quality c from Kaufmann, Kraay, and Mastruzzi (2004). GDP c from the World Bank. Contiguity c,c0 , Colonial Relationship c,c0 , and Common Language c,c0 from CEPII. Vertical Integration Index f ,Tariff k,c , Input Tariff k,c , Export Tariff k,c , Size f , Herfindahl k,c , and MFN Share k,c are in levels; all other variables (with the exception of indicator variables) are in logs. 40 Table A-3: Vertical integration by 2-digit SIC industry Industry TEXTILES APPAREL CHEMICALS PRIMARY METAL PRODUCTS ELECTRICAL MACHINERY TRANSPORTATION EQUIPMENT PETROLEUM REFINING LEATHER RUBBER AND PLASTICS MACHINERY, EXCEPT ELECTRICAL MANUFACTURING NEC LUMBER AND WOOD PRODUCTS FOOD AND KINDRED PRODUCTS TOBACCO MANUFACTURES STONE, CLAY, GLASS, & CONCRETE FABRICATED METAL PRODUCTS PRINTING AND PUBLISHING SCIENTIFIC INSTRUMENTS PAPER AND ALLIED PRODUCTS FURNITURE AND FIXTURES SIC 22 23 28 33 36 37 29 31 30 35 39 24 20 21 32 34 27 38 26 25 VI index 0.115 0.111 0.098 0.091 0.089 0.067 0.062 0.062 0.060 0.060 0.059 0.059 0.056 0.053 0.049 0.039 0.039 0.036 0.034 0.022 Notes: Data from 2004 WorldBase data, Dun & Bradstreet. Sample includes firms ≥ 20 employment in the manufacturing sector, excluding multinationals. 41 Table A-4: Tariffs and vertical integration, Poisson quasi-maximum likelihood estimator Capital Intensityk x Financial Developmentc (2) 0.0121** (0.0058) 0.0385** (0.0165) (3) 0.0281*** (0.0086) 0.0545** (0.0267) (4) 0.0114* (0.0061) 0.0443** (0.0178) (5) 0.0258*** (0.0092) 0.0651** (0.0293) (6) 0.0117* (0.0064) 0.0484** (0.0208) (7) 0.0126** (0.0058) 0.0399** (0.0165) (8) 0.0108* (0.0064) 0.0469** (0.0205) (9) 0.0191* (0.0105) 0.0822** (0.0361) Capital Intensityk x Legal Qualityc -0.153** (0.0629) -0.232** (0.1030) -0.164** (0.0679) -0.265** (0.1140) -0.189** (0.0744) -0.163*** (0.0629) -0.176*** (0.0738) -0.337** (0.1370) 0.0043 (0.0050) -0.0042 (0.0208) 0.0002 (0.0070) 0.0322*** (0.0079) 0.0210 (0.0210) -0.0011 (0.0072) 0.0284 (0.0520) 0.0565*** (0.0142) 0.0365*** ( 0.0105) 133,607 386 YES 99,017 311 YES Tariffk,c (1) 0.0126** (0.0058) Input Tariffk,c -0.0122 (0.0201) Export Tariffk,c Herfindahlk,c 0.0027 (0.0290) Sizef 0.0438*** (0.0079) Labor Productivityf # Observations # Sectors Sector and Country Fixed Effects 149,992 386 YES 149,992 386 YES 116,086 311 YES 142,364 386 YES 110,448 311 YES 133,413 386 YES 149,992 386 YES Notes: Robust standard errors clustered at the country-sector level are in parentheses denoting *** 1%, **5%, and *10% significance. The sample includes firms ≥ 20 employment in manufacturing sectors, excluding multinationals. Dependent variable: Vf,k,c , the vertical integration index of firm f , with primary sector k, located in country c. Explanatory variables are in logs and can be interpreted as elasticities. Tariffk,c is the log of the MFN tariff imposed by country c in sector k. Capital Intensity k is the total capital expenditures divided by value added. Financial Development c measures private credit by deposit money banks and other financial institutions as a fraction of GDP. The variable Legal Quality c proxies for the quality of a country’s institutions. Import Tariffk,c is the tariff imposed by country c on inputs of good k. Export Tariffk,c is the tariff faced by firms exporting good k from country c. Herfindahlk,c is the Herfindahl index of sector k in country c. Sizef is predicted (with sector-country dummies) firm size, Labor Productivityf is predicted (with sector-country dummies) sales per worker.