Global supply chains, firm scope and vertical integration: evidence from China

Abstract

This article investigates how firms organize supply chains within and across countries. Utilizing highly disaggregate customs trade statistics for Chinese processing exports, I develop a novel strategy for measuring the position of cities on the value chain. By linking variation in value chain position over time and across cities, to changes in the share of exports that are foreign owned, I assess the role of sequential production in determining optimal vertical integration and firm scope along the global supply chain. I provide evidence that the supply chain position of intermediates and the degree of substitutability across sequential stages of production provide incentives for firms to own intermediate good suppliers, consistent with the theoretical predictions of Antras and Chor (2013, Econometrica, 81: 2127–2204). Additionally, I find evidence that the value added to gross output ratio depends critically on supply chain position—value added increases as firms move down the supply chain, toward final production—which is consistent with Fally and Hillberry (2015, Working Paper 21520, NBER).