Essays on vertically integrated multinational enterprises: Theory and evidence

This dissertation investigates, theoretically and empirically, the incentives for vertical integration across borders and the emergence of vertically integrated multinational firms. Based on incomplete contract theory, chapter one develops a model of an endogenous ownership structure when two firms from two countries have a vertical production linkage. By aligning ownership with the right of control, the model shows how a vertically integrated multinational firm will emerge by comparing the costs and benefits of the integrated ownership structure with the non-integrated one. Using the data published by the Bureau of Economic Analysis, chapter two derives an index to measure the degree of vertical integration for U.S. multinational firms. By comparing the principal industry of U.S. parents and their majority-owned affiliates abroad, the study shows a significant degree of vertical integration for U.S. multinationals. Furthermore, the degree of vertical integration for U.S. firms in developed countries is as high as that in developing countries. Based on the theoretical model developed in chapter one and the vertical measures derived in chapter two, chapter three examines the correlates of two vertical intensities. One measures the proportion of vertical direct investment to horizontal investment; the other measures the extent of vertical direct investment to firms\u27 other international operations. It is found that parent-affiliate wage differential encourages more vertical direct investment when compared with horizontal direct investment. However, the wage differential is negatively rather than positively correlated with the second vertical intensity. In sum, the measurable theory indicators tend to correspond better to incomplete contract theory than to factor proportions theory. Chapter four is used as a case study for the non-contractible approach to vertical integration. Based on the current accounting rate system that governs international calls in the telecommunications industry, it is shown that an integrated ownership structure is preferred when one of the two markets is very elastic in demand or is much smaller in market size. On the other hand, a non-equity relationship will dominate when both markets are inelastic and similar in market size