Question

Statement 1: Sometimes firms will want to vertically integrate so that they can alter the tax jurisdiction where they earn profit.

Statement 2: When there is a lot of asset specificity and very little uncertainty about the future, vertical integration is typically preferred to a long term contract.

these are true or false

Answer 1

Answer -

1. Given statement is correct.

Explanation -

Vertical integration is a process by which a company own or control the supplies, distributor or retail location for reducing costs ,improving efficiency. If a company having customers or suppliers located in countries with lower tax rates ,it is benificial to purchase one of those companies to shift the profits to lower tax located.In such a way they can alter tax jurisdiction for earning profit.

2.The given statement is true.

Explanation -

Asset specifity is an important determinant of vertical integration.Asset specificity is defined as to what extent investmennt in assets are specific to said agreement.when there is a lot of asset specifity and less uncertainty about future,these vertical integration doesn't consider any risk factor for long time profitability so it preferred long term contract.