Two hypotheses accounting for the different levels of vertical integration in the United States and Japanese auto industries

U.S. automobile assembler firms tend to produce a greater portion of parts in-house than do Japanese firms, and they perform the majority of detailed engineering tasks on such parts. Japanese assembler firms, in contrast, subcontract for more complex parts, on which a substantial amount of engineering tasks have already been supplied by the subcontractor. This research offers two hypotheses to explain the difference in procurement strategies: (1) Since Japanese input and output markets are less volatile than those in the U.S., it is easier for Japanese firms to negotiate self enforcing agreements in the presence of incomplete information and (2) U.S. security and antitrust laws deter stockholders from effectively monitoring managerial opportunism. I jointly test both hypotheses by regressing levels of vertical integration in both countries against volatility of demand, volatility of costs, levels of long term debt to equity, and portion of stock held by the five largest investors. I find that vertical integration is positively and significantly correlated to increased volatility in output markets and negatively and significantly related to concentration of ownership. This latter effect is empirically larger.