Contract Enforcement Efficiency And Production Organization Mode

The final product manufacturers need to make a choice from different organization forms when they want to obtain intermediate inputs. Companies can make acquisition of intermediate inputs suppliers to obtain the inputs by vertical integration, when the inputs transaction is carried out within the boundaries of the enterprise. Otherwise, the company could also trade with suppliers to purchase the inputs outside the boundaries. Are the companies’choices between vertical integration and outsourcing based on the external environment or their own features? In recent years, more and more economists turn attention to business trade within the industries and even the enterprises, trying to answer the question of production organization. In Antras (2003), the first model of property rights in a closed economy was constructed and described firms could control the intermediate inputs investments more effectively to avoid underinvestment by vertical integration when the intermediate investments are ex ante noncontractible. Afterwards Antras and Helpman (2004) extended the theory to international organization of production decisions, provides a reliable theoretical basis for the decision of the multinational enterprises’organizations.In this paper, I simplified the model in Antras and Helpman (2004) and constructs a econometric model with related characteristic data of Chinese manufacturing enterprises to examine some of the conclusions. This paper divides the empirical research into enterprises and industries levels, uses the value added ratio to measure the degree of vertical integration as the explained variable and applies the contract enforcement institution quality, the capital intensity and other factors as the explaining variables. The empirical results has been more detailed than previous articles.The study shows that with higher efficiency of contract enforcement, the companies tend to purchase the intermediate inputs from independent suppliers; and higher capital and technology intensive enterprises prefer vertical integration approach. Otherwise, the development of financial system and marketization would have positive effect on the vertical industry specialization.