Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters
We study the relationship between firms’ output quality and their choice of organizational structure. To do so, we use data on each step of the production and transaction chain that makes up Peruvian fishmeal manufacturing. We first show that quality upgrading is an important motive for vertically integrating. Firms integrate suppliers when the quality premium—the relative price of high quality output—rises for exogenous reasons, but not when average or low quality prices rise. The greater a firm’s scope for shifting low to high quality production, the greater its integration response. We then show that integration changes suppliers’ production behavior. A given supplier’s actions are less geared towards increasing quantity and more geared towards maintaining input quality after the supplier is integrated and loses access to alternative pay-per-kilo buyers. Finally, we show that firms and individual plants that use integrated suppliers at the time of production ultimately produce a significantly higher share of high quality output. In sum, our results suggest that firms change their organizational structure when their output quality objectives change because controlling the incentives of independent suppliers facing a quantity-quality trade-off is difficult, as classical theories of the firm predict.
We are especially grateful to Francesco Amodio, Bob Gibbons, Amit Khandelwal, Eric Verhoogen, and Chris Woodruff for detailed feedback. We also thank Charles Angelucci, David Atkin, Jie Bai, Jing Cai, Lorenzo Casaburi, Wouter Dessein, Dave Donaldson, Marina Halac, Oliver Hart, Rocco Macchiavello, Ameet Morjaria, Kaivan Munshi, Andrea Prat, John Van Reenen, Xiao Yu Wang, and Daniel Wolfenzon for very helpful comments and suggestions; seminar participants at Cambridge, Columbia, LSE, MIT, NBER, UPF, Zurich, the Markets and Organizations in Emerging Economies Conference, the Society of Institutional and Organizational Economics, the Summer School in Development Economics (SSDEV), and the IGC/Stanford SCID conference on Firms, Trade and Development; and Patrick Kennedy and Leonor Lamas for great research assistance and field work. The Peruvian Ministry of Production, Cesar Casahuamán, and IFFO (in particular Enrico Bachis and Jorge Mora) kindly shared access to data. León acknowledges financial support from the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV2015-00563) and grant ECO2011-25272. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Christopher Hansman & Jonas Hjort & Gianmarco León-Ciliotta & Matthieu Teachout, 2020. "Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters," Journal of Political Economy, vol 128(9), pages 3570-3625.