Vertical Quasi-integration: Theoretical Foundation, Rationality And Stability

Vertical quasi-integration is a sort of mixed governance structure between vertical integration and market, and in fact, it is inter-firm relationship between a purchaser and a supplier under subcontract. The inter-firm quasi-integration exists in two forms: specific investment made by the purchaser and specific investment made by the supplier.Actually, quasi-integration is a common phenomenon in the world, especially in transnational corporations and enterprise clusters. At present, the study on vertical quasi-integration is still limited to case study. The purpose of this thesis is to probe the theoretical foundation, rationality and stability of vertical quasi-integration.GHM model is the basic analysis tool of the thesis. What GHM model focuses on is the incentive problem of specific investment, which can explain the quasi-integration in America, that is, the purchaser makes investment and the supplier uses it. The thesis expands it in order to explain the quasi-integration in Japan, that is, the suppliers make investments that are customised to their purchaser and produce special semifinished products. Then, the thesis compares the different institutional arrangements and confirms which one is better.The structure and content of the thesis are as follows:Chapter 1 Summarize the evolvement of firm theory. According to the development of Coase’s ideas, analyze the nature of the firm and the reason that the boundaries of the firm evolve, and indicate that the evolvement of the firm boundaries not only involves in vertical integration caused by hold-up, but also the reverse development trend.Chapter 2 Clarify the connotation of Coase Theorem, and by dint of a simple principal-agent model, explain the limitations of solving moral hazard problem of intra-corporation agent through selling property rights to him. Then, quest a way to solve the problem of lower efficiency of the vertical integration from the perspective of property right motivation,and demonstrate that high-powered incentive of property rights under market competition is the theoretical foundation of vertical quasi-integration.Chapter 3 Use a simple GHM model and its expanding model, comparatively analyze three different institutional arrangements under the two kinds of conditions of specific assets invested by the purchaser and specific assets invested by the supplier. Owing to the problem that the party who holds the control right transfers cost or revenue, non-integration is better. For the non-integration under the condition of specific assets invested by the purchaser, the purchaser holds in the supplier’s opportunism behavior by taking it as a threat to transfer assets to other suppliers. If the purchaser transfers his assets, however, he has to pay some expenses for it, so the threat has only lower reliability. Comparatively, the model that the suppliers invest specific assets and the purchaser owns shareholdings of the suppliers is better. The purchaser should hold the lowest rate of the supplier’s shareholdings at its approval, and takes it as a credible commitment that he will not hold up. Meanwhile, the fact that the purchaser owns shareholdings of the suppliers also can compensate the shortage of specific investment. Obviously, the latter is more rational.Chapter 4 Use the prisoners’dilemma game to explain that cooperation can reach a win-win situation; Infinite repeated game shows that the two parties can break the dilemma as long as the long-run cost of default is greater than one-time gains; the KMRW reputation model indicates that under the reputation mechanism, finite repeated transactions can also make the two parties cooperation. That is, repeated transactions and reputation mechanism can make inter-firm quasi-integrative cooperation stable in a long-run.Chapter 5 Indicate that when contract is incomplete, the two separate firms with vertical relationship who can renegotiate and have symmetric information will tend to long-run cooperation. The anticipation of repeated transactions makes them risk-neutral. Establish a quasi-integration model, and point out that under vertical quasi-integration the supplier will make efforts to reduce actual cost in short-run, and obtain stable transaction chances in long-run and higher incentive intensity on the basis of good performance; the purchaser can benefit in short-run from the reduction of actual cost of the supplier, and obtain lower contracting cost in long-run from their stable cooperation; if the supplier is not less than one, there will be competition among them; if the purchaser is not less than one, the supplier who provides products for two or more purchasers at the same time can realize scale economy. The situation of coexistence of competition and cooperation will enhance economic efficiency. Chapter 6 Take toyota motor company as an example to make a positive analysis. The institutional foundation of vertical quasi-integration in toyota company is property right institutions, and its distinctive features are as follows: suppliers make investment that are customised to their purchaser; the purchaser owns partial shareholdings of their suppliers; the cooperation between the purchaser and the supplier are stable in long-run;“double-supplier policy”keeps suppliers competitive; rewards and punishments mechanism make suppliers reduce cost, and the purchaser will share risk and benefit with them. The results support the conclusion of the thesis.The above analysis shows that the non-integration with the supplier’s investment is the optimal institutional arrangement, which is established on the basis of high-powered incentive of property rights with repeated contracting, the two partiers can both benefit from the supplier’s efforts, and repeated contracting can reduce transaction cost. If the asset specificity is stronger, the purchaser will own partial shareholdings of their suppliers. In doing so, the shortage of specific investment will be compensated, and meanwhile, it is regarded as the credible commitment to the supplier’s specific investment.Therefore, the non-integration with the purchaser’s share and the supplier’s specific investment is the optimal institutional arrangement, and its theoretical foundation is high-powered incentive of property rights under competitive conditions. The supplier as a separate firm is under high-powered incentive of property rights, and repeated contracting between the purchaser and the supplier makes the purchaser’s transaction cost of outsourcing semifinished product reduced, thus, this kind of model of vertical quasi-integration has internal rationality and stability itself.