The missing option in firm boundary decisions

Most studies on firm boundary decisions assume that the decision to integrate or outsource is unilateral: it is either the buyer firm that chooses to integrate or outsource the seller firm (backward integration versus outsourcing), or the seller firm that chooses to integrate or outsource the buyer firm (forward integration versus outsourcing). The possibility of the coexistence of backward and forward integration is barely addressed due to data limitations. In this paper, I compile a database of 85,783 transaction relationships between 25,919 firms from 122 countries. This database identifies who is the buyer, who is the seller and whether one side owns the other. This is the first cross-industry database that allows one to distinguish between the two types of integration. The data show that backward and forward integration coexist within narrowly defined industries, which contradicts the widely adopted assumption that only one type of integration exists. I construct a property rights model featuring the coexistence of backward and forward integration, and find positive support for its predictions. In contrast, existing studies of integration based on large-scale cross-industry databases always assume backward integration, which I show leads to weaker support for the theory. The findings in this paper suggest that (1) the integration between an upstream firm and a downstream firm is bilateral in the sense that either firm could be the integrator; (2) the two types of integration are very different in nature, as suggested by the property rights theory; (3) the lack of support for the property rights theory might be partly driven by the scarcity of appropriate databases that allow researchers to detect the type of integration.