American Economic Review: Vol. 90 No. 5 (December 2000)


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"Globalization" and Vertical Structure

Article Citation

McLaren, John. 2000. ""Globalization" and Vertical Structure." American Economic Review, 90(5): 1239-1254.

DOI: 10.1257/aer.90.5.1239


This paper analyzes the effects of international openness on vertical integration. Vertical integration can confer a negative externality, by thinning the market for inputs and thus worsening opportunism problems; this induces strategic complementarity and multiple equilibria in the integration decision, thus providing a theory of different "industrial systems" or "industrial cultures" in ex ante identical countries. International openness thickens the market, facilitating leaner, less integrated firms, thus providing gains from international openness quite different from those that are familiar from trade theory. This may be taken as one theory of "outsourcing," "downsizing," and "Japanization" as consequences of "globalization."

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McLaren, John (U VA and NBER)

JEL Classifications

F12: Models of Trade with Imperfect Competition and Scale Economies
L16: Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices
F15: Economic Integration
L22: Firm Organization and Market Structure

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