Backward and Forward Integration Along Global Value Chains

Both backward (upstream) and forward (downstream) vertical integration strategies shape the organization of global value chains (GVCs). Yet, many studies make the unrealistic assumption that integration decisions are binary and one-directional. That is, for each production stage, companies make the integration decision only once, and this can be either backward or forward but not in both directions. The aim of this paper is to analyze the firm-level organization of GVCs when both vertical integration decisions are taken into account. Exploiting a global sample of more than 1.4 million firms, we first document how midstream parents, which actually integrate on both directions along the chain, are at least as common as downstream and upstream parents. We then find that parent companies prefer to integrate production stages with a relatively low elasticity of substitution and with a technological proximity on the supply chain. Finally, we provide evidence that more than one subsidiary in a given location can perform the same production stage.