Question

Chapter 1 discussed the history of the vertically integrated corporate giants of the early 20^th century. Use concepts to explain why firms facing the following conditions are more likely to vertically integrate: (1) The firm is in a developing economy; (2) the firm uses a capital intensive production process. Be sure to discuss both reasons to make and reasons to buy.

Answer 1

(1) Firms in a developing economy face stiff competition as the market is up for grab and everyone is trying to consolidate its position in the market. A developing economy provides firms the opportunity to increase its market share. So, in the face of stiff competition, companies try to gain advantage through various strategies. One of them is vertical integration. This allows companies to consolidate more power through forward or backward integration. This allows firms a much-needed independence from suppliers and control costs. Vertical integration also allows firms to achieve economies of scale.

(2) Firms using a capital intensive production process opt for vertical integration so that they are in control. A lot of investment is required in a capital intensive firm. So, it is important that the firm consolidate power in terms of suppliers and distribution network. The intention is to eliminate middle men and reach directly to the customers and offer them products at competitive prices.