Which firms are involved in foreign vertical integration?

Abstract

In line with the literature that considers that transaction costs, asset specificity and incomplete contracts play a key role in the "make or buy decision", this paper seeks to identify the characteristics of offshoring firms that make them more or less likely to integrate their activities in a foreign country. Our results show that the real candidates for foreign vertical integration are those firms that have a large share of their inputs provided by headquarters. Firms engaged in foreign vertical integration are more capital and skill-intensive than those exclusively dedicated to foreign outsourcing. The degree of foreign vertical integration also matters since the most intensively integrated firms are also the most productive. We also demonstrate that international experience and product differentiation favor foreign vertical integration.