Gianpaolo Rossini University of Bologna 1 Vertical integration, disintegration and ability to export Gianpaolo Rossini and Laura Vici Department of Economics, University of Bologna

Gianpaolo Rossini University of Bologna 2 Introduction Firms' heterogeneities: Least productive firms do not exit in an imperfectly competitive environment -> make lower profits and confine to the domestic market.

Gianpaolo Rossini University of Bologna 3 Where do differential performances come from? 1.Technology and process innovating R&D 2.Market strategies and other forms of R&D 3.Internal (vertical) organization mode

Gianpaolo Rossini University of Bologna 4 Focus of the paper Internal (vertical) organization of exporting firms. Related theoretical (Helpman, 2006) and applied (Rossini and Ricciardi, 2005) contributions. LITERATURE: More efficient firms more vertically integrated on both a domestic and a cross-border basis (Antras and Helpman, 2004; Grossman and Helpman, 2002; Buehler and Schmutzler, 2003)

Gianpaolo Rossini University of Bologna 5 Main question Is exporting activity going to affect the degree of vertical integration (VI)? Or, are more vertically integrated firms exporting more than vertically disintegrated enterprises?

Gianpaolo Rossini University of Bologna 6 Main results We provide a link between literature stating that only more productive firms export and literature stating that more productive firms are more vertically integrated. FINDING: the more firms export the more VI they are. Why? A matter of size, since larger firms are more VI.

Gianpaolo Rossini University of Bologna 7 Theoretical set up Comparison between VI and VD crossborder Cournot duopolies, with differentiation. VD linear pricing: most common practice among input producers. 2-3 stages: VI –VD, Ex - no ex, vertical interaction between U and D

Gianpaolo Rossini University of Bologna 8 NOVELTY Payoffs: profits per unit of capital invested. Shareholders aim at the maximum profit per unit of capital.

Gianpaolo Rossini University of Bologna 9 Scenario 1 Small firm versus large firm, home bias VD subgame: (vertical restraint as in Rossini, 2007). The small firm never exports, neither in the game equilibrium nor in subgame: VI firms (and also VD) may export only if they are large

Gianpaolo Rossini University of Bologna 10 Scenario 2 Small firm versus large firm, low Home Bias The large firm goes VI and exports, the small firm goes VI but does not export. In the VI and VD subgames the large firm exports. The small does not.

Gianpaolo Rossini University of Bologna 11 Econometric tests Dependent variable: level of VI ∈ [0,1]. Two specifications: 1.size, productivity and exports as explanatory variables 2.includes R&D expenditure.

Gianpaolo Rossini University of Bologna Model 1Model 2 Coeff. (s.d.) const0.257***0.283*** (0.009)(0.022) X0.091*** (0.008)(0.019) PR0.001***0.001*** (0.000) R&D0.328** (0.136) Size (0.008)0.067 n.obs R F

Gianpaolo Rossini University of Bologna 13 Conclusion Export activity seems to increase VI mostly among large firms.