Vertical Integration and Technology: Theory and Evidence

This paper investigates the determinants of vertical integration and confronts some of the predictions of the leading approach to the internal organization of the firm with data from the UK manufacturing sector. Consistent with the theory, it shows that an upsteam and downstream activity pair are more likely to be vertically integrated, when the downstream (the producer) is more technology intensive and the upstream (the supplier) is less technology intensive. Also consistent with the theory, the magnitude of both effects are substantially amplified when the upstream inputs are an important fraction of the total costs of the downstream producer. These results are generally robust and hold with a variety of alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics. JEL: L22, L23, L24, L60.