Import competition and vertical integration: Evidence from India

Recent theoretical contributions provide conflicting predictions about the effects of product market competition on firms’ organizational choices. This paper uses a rich firm-product-level panel data set Indian manufacturing firms to analyze relationship between import and vertical integration. Exploiting exogenous variation from changes in India’s trade policy, we find that foreign competition, induced by falling output tariffs, increases backward integration domestic firms. The are concentrated among with high productivity industries relatively low initial levels competition. In contrast, input tariffs seem have countervailing incentives. We also evidence is associated lower marginal costs increasing markups at firm-product level. • liberalization Competition, induces Effects stronger for high-productivity when high. Vertical markups. Foreign spurs R&D business investment