Analysis Of Relationship Between Level Of Vertical Integration And Performance Of Listed Firms

Vertical Integration Strategy is one of the most important decisions in business management, which comes down to every aspect of the enterprises’ internal production and operation. Under the increasingly fierce business competition, more and more listed firms choose the vertical integration strategy to improve their comprehensive strength. Along with the transition from planned economy to market economy in China, enterprises begin to pay attention to the impacts of vertical integration strategy on firms’ survival and development during the process of looking for better management strategies. However, there are not too many studies on the impacts of this strategy because of the difficulties in data collection. Thus firms have little theoretical support when they consider using vertical integration strategy. This article uses the financial data of the 2014 annual report of Chinese listed companies to study the relationship between the level of vertical integration and performance of listed firms by means of statistic description and empirical analysis, applying the quadratic model after linear model. The author chooses the method of VAS to measure the level of vertical integration and several indexes to measure the performance of firms.This article set up models to obtain different relationships between VAS and different performance indexes. In these four performance indexes, only gross profit margin reveals a U curve pattern with the level of vertical integration and there’s no significant correction between other performance indexes and vertical integration. This finding tells that during the process of implementing the vertical integration strategy, firm’s gross profit margin will decrease first and then increase to a new high level. Firm’s performance(on behalf of gross profit margin) can only achieve a steady increase procedure after the vertical integration level has reached a high mature level. The insignificant relationships between other indexes and VAS do not deny the existence of their potential relationships and the article gives possible explanations.Finally, this article gives suggestions on future development of enterprises in China based on the findings of empirical studies. First, enterprises should know their own features and the stages of their development level before vertical integration strategy is implemented, which means that they must make balance between vertical integration and operation performance. Second, companies should also consider about industry heterogeneities and realization possibilities comprehensively rather than making decisions blindly. At the same time, we should consider microscopic conditions and macro background so as to make best decisions for the development of the firm.