Restructuring the Boundaries of the Firm: Changes in Vertical Integration

This chapter examines the way in which previously highly integrated enterprises have restructured their vertical boundaries, both with respect to the internal production of inputs and their functional integration. Companies with an investor who was the main force in the restructuring of the product range are very likely to be functionally integrated with their investor and foreign direct investment in general is associated with a smaller than average propensity to use entirely external suppliers. The contention that on the enterprise level a reduction in vertical integration is needed to increase productive efficiency and a reduction in horizontal integration is a prerequisite for greater allocative efficiency is so widespread that it is rarely discussed in depth in the enterprise restructuring literature. The network literature elaborates on the risk hedging implications of the creation of holding companies with ownership stakes in separated-out suppliers.