Can the Property Rights Theory Explain Cross-border Vertical Integration of Multinational Firms? Firm-level Evidence in Korea

We empirically test the property rights theory for multinational firms’ decision on cross-border vertical integration. To examine its unique predictions that alternative theories, such as the transaction cost economics, do not imply, we investigate not only the impact of the importance of producers’ relationship-specific investment on vertical integration decision but also that of suppliers’ relationship-specific investment. Using data on Korean multinational firms in the producing industries and their foreign affiliates in the supplying industries, we find that cross-border backward vertical integration is positively related to the R&D intensity of domestic producing industries, and negatively related to that of foreign supplying industries. In the growing literature on the boundaries of multinational firms, we provide novel test results that the property rights theory can explain multinational firms’ decision on cross-border vertical integration.