Vertical Integration and Inventory Management Efficiency *

Abstract

Abstract This paper investigates the role of vertical integration in the inventory management of a supply chain. Taking Chinese listed companies from 2001 to 2010 as our sample, we find that vertically integrated firms have lower inventory holdings and volatility, indicating that vertical integration improves firms’ inventory management efficiency. Further analyses show that this effect is more pronounced for firms located in regions with a lower level of marketisation and for firms facing higher demand volatility and business growth. In addition, the more thoroughly firms have accomplished vertical integration, the more greatly vertical integration increases inventory management efficiency. Finally, we find that the positive impact of vertical integration on inventory management is more significant in industries with no overcapacity, for diversified firms, and during non-crisis periods.