Lock-In, Vertical Integration, and Investment: The Case of Eastern European Firms

13  January 2011    4:00 pm

Liliane Giardino-Karlinger, University of Vienna

In cooperation with:
Research Centre International Economics (FIW) 


wiiw, Rahlgasse 3, 1060 Vienna, lecture hall (entrance from the ground floor)


A key prediction of transaction cost economics (TCE) is that the presence of relationship-specific assets increases the likelihood of vertical integration whenever contracts are incomplete. I explore a firm-level data set on Eastern European and Central Asian firms, the BEEPS 2005 Survey provided by the EBRD and World Bank, to test this prediction. I measure lock-in by supplier substitution, and find the TCE prediction confirmed in the data. Testing whether the determinants of vertical integration also drive investment decisions, I find that lock-in raises the probability to engage in R&D, but has no robust effect on investment in physical assets.

JEL classification: L14, L23, L25