Abstract
In a setting of economic and financial crisis, most companies experienced a reduction in their profitability. Thus, our study allows us to identify vertical integration strategies developed by companies to overcome the crisis. This paper is aimed at unveiling the determining factors of the profitability of Spanish agrifood firms, depending on whether they are backwards vertically integrated or not. In order to attain our objective, we implemented a first difference regression model. The main contributions of the article lie in the incorporation of a variable that distinguishes integrated firms from the rest and the separate analysis of the two groups of firms. The results suggest that firms that seek to differentiate themselves, either through offering a specific product or through providing higher quality with a view to maintaining their reputation, are more likely to adopt vertical integration due to the higher transaction costs of relations with suppliers. The grouping carried out in this study is shown to be highly relevant as asset structure implies different strategies for actions aimed at increasing profitability.
Highlights
In the strict sense of the term, vertical integration means carrying out more than one activity within the value creation chain
This research examines these notions from the perspective of transaction cost theory, which states that economic activity is organized according to the costs implied in contractual relations within which business activity develops
Organizations adopt vertical integration if the costs involved in carrying out the activity themselves are less than the transaction costs, including the agency costs derived from the relationships between firm and supplier when purchasing the raw materials, or between firm and customer when distributing the finished product
Summary
In the strict sense of the term, vertical integration means carrying out more than one activity within the value creation chain. We focus on the vertical integration of manufacturing firms. If such firms are only devoted to the second link in the chain, they purchase raw materials from third parties and sell the products to distributors. If the manufacturing firm undertakes the activity of supplying raw materials, this results in a backwards vertical integration, whereby the firm becomes its own supplier. If the manufacturing firm takes over the distribution of its products, this constitutes a forward vertical integration, where the firm becomes its own customer
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