The Analysis On The Influence Of Steel Enterprises' Backward Integration On Corporate Performance

Steel industry is resource-intensive. And without the support from the upstream industry and the upstream enterprise, the steel industry and the steel enterprise do not have the opportunities of great development. The management of the vertical relationship between the steel enterprise and the upstream enterprise has become an important factor which influences the development of the enterprise.This paper firstly summarizes the existing literatures and classic works on vertical relations of enterprises finding that the existing literatures have constructed an analytical framework but put little emphasis on vertical relationships between steel enterprises and upstream as well as downstream enterprises, especially lack of specific research paper on it. Secondly, the paper introduces the transaction cost theory, where it starts from the concepts of transaction cost in connotative and denotative perspectives respectively, then it goes with how transaction cost is determined from three perspectives:human factors, related factors with specific transactions and market environment factors, and ends up with that transaction cost theory can best carry out the analysis of vertical relations between steel enterprises and upstream ones. Specifically, Chapter Four gives a vivid introduction about the present vertical relationships among steel enterprises, ironstone mining and dressing enterprises, coal mining enterprises and electric power enterprises. In addition, through the analysis according to this theory, this paper finds out that steel companies have strong asset specificity which provides the possibility for the opportunistic practices by upstream companies. In fact, the steel enterprises can be easily threatened by the international ironstone giant with its global monopoly and coal mining as well as electric power enterprises with its geographical location advantage. Hence, backward vertical integration is a powerful measurement to lower transaction cost and avoid being "caught" for steel enterprises. After all these theoretical analysis, this paper turns to empirical analysis about the degrees of backward integration of steel companies. It uses the method called Separation of Primary and Subsidiary Businesses to get the index of backward integration in which Return on Equity deducting nonrecurring items is taken as explained variables and the backward integration index, total asset scale, asset liability ratio, net worth turnover ratio as well as market concentration degrees are as explanatory variables. The results clearly indicate that backward integration of steel enterprises can in fact promote the efficiency, which fits perfectly in with the original theoretical analysis.Thus, both theoretical and empirical analysis shows that backward integration of steel enterprises can promote the efficiency indeed. In this case, what specific measures can be taken becomes an important issue. This paper makes a comparative study on four management measures including bureaucracy governance, leadership governance, relationship governance and market-oriented governance, and sphere of application as well as the transaction cost. Finally this paper puts forward policy proposals suggesting that the government can provide policy support for large-scale steel enterprises to do backward integration and adopt appropriate ways to do so.