Import competition and domestic vertical integration: theory and evidence from Chinese firms

The objective of this study is to investigate how import competition affects firms' backward vertical integration choices. We first build a Nash-bargaining model to guide and provide insights into our empirical work. Then, we employ data from Chinese listed firms and the BvD Zephyr dataset to compile a firm-level sample for the period from 2000 to 2023 to test the theoretical predictions. Consistent with the model, we find that a decrease in downstream tariffs leads to more backward vertical integrations, and it is robust to various empirical model specifications and variable measurements. The mechanism analysis results support the model's prediction that declining upstream tariffs and upstream underinvestment problem will promote more backward vertical integration of downstream firms. We further show that access to technology is an important mechanism to understanding modern firms' backward vertical integration choices in an intensely competitive environment. Our research provides new perspectives and evidence on how firms optimize their production organization in the process of globalization.