"Globalization" and vertical structure

This paper analyzes the effects of international openness on vertical integ ration. Vertical integration can confer a negative externality, by thinning the market for inputs and thus worsening opportunism problems; this induce s strategic complementarity and multiple equilibria in the integration deci sion, thus providing a theory of different "industrial systems" or "industr ial cultures" in ex ante identical countries. International openness thicke ns the market, facilitating leaner, less integrated firms, thus providing g ains from international openness quite different from those that are famili ar from trade theory. This may be taken as one theory of "outsourcing," "do wnsizing," and "Japanization" as consequences of "globalization".