IS VERTICAL DISINTEGRATION PREFERABLE TO INTEGRATION WHEN THERE IS PROCESS R&D?

Vertical integration (VI) may show social superiority over vertical disintegration (VD) if there is an opportunity of internalizing most of the externalities affecting vertical arm's length relationships. When enterprises carry out process innovating R&D (PIRD), VI turns out to be quite often privately and socially superior to VD. However, there are circumstances where VI does not provide the same incentive to carry out PIRD. VD pushes further PIRD displaying instances of private superiority and even some spells of social desirability. If PIRD costs are asymmetric along the vertical chain of production, fresh advantages of VD may appear. In this sense, the paper may supply an additional interpretation of the recent wave of domestic and cross-border VD.