What Firm-Level Data Reveals About Global Value Chains and Integration: CID Faculty Research Insights

How do global value chains evolve when firm-level decisions about vertical integration are shaped by demand elasticity, contractibility, and productivity?

Key Findings:

• Demand elasticity influences integration structure: Firms facing highly elastic demand tend to outsource upstream inputs while integrating downstream stages (sequential complements). Firms with inelastic demand do the reverse, internalizing upstream inputs and outsourcing downstream activities (sequential substitutes).
• Value chain position matters: The upstream or downstream nature of integrated versus outsourced stages varies with demand elasticity. Firms facing elastic demand are more likely to internalize downstream operations, while those with inelastic demand integrate more upstream inputs.
• Contractibility shapes organizational boundaries: When upstream inputs are more contractible, firms are more likely to internalize them in the complements case. In the substitutes case, higher upstream contractibility supports greater outsourcing.
• Firm productivity affects integration depth: More productive firms internalize a greater share of the production process. They can better absorb the fixed costs of vertical integration, leading them to manage longer stretches of their supply chains in-house.
• A new industry-pair measure of upstreamness: The paper introduces a novel measure of the upstreamness of an industry relative to another, generalizing a prior industry-level measure by Antràs and Chor (2013). This new industry-pair metric is has been adopted in GVC research and enables more precise mapping of production stage relationships across sectors.  

Impact and Relevance:

This study advances our understanding of firm-level decisions on value chain integration, combining theoretical modeling with rich global data. By bridging the property rights theory of the firm with large-scale empirical evidence, the paper explains how firm-level choices about vertical integration are shaped by input characteristics, market conditions, and production stage placement. The framework clarifies how differences in upstreamness, contractibility, and demand conditions drive heterogeneity in organizational structure, even among firms operating in the same sector.

The findings carry significant implications for trade policy, industrial strategy, and global supply chain management. As global production networks face increasing policy and geopolitical pressure, particularly in strategic industries like semiconductors and pharmaceuticals, this research offers guidance on when internalizing supply chain stages may be beneficial. It shows that firms' optimal integration strategies vary depending on demand characteristics and contracting environments, suggesting that uniform reshoring or integration mandates may misalign with firm-level incentives in complex production systems. 

More broadly, the paper highlights that the configuration of global production is determined not only by tariffs or transport costs, but also by internal firm decisions shaped by incomplete contracts and coordination challenges. It moves the field beyond aggregate models of global value chains and into the granular reality of firm decisions under contracting frictions. The results pave the way for future research on how technological change, institutional quality, and digital tools may reshape firm boundaries and supply chain strategies in the evolving landscape of globalization.