Industrial structure and economic performance: The role of productive public expenditure

• Author: Cheng‐wei Chang
• Published date: 01 May 2019
• Date: 01 May 2019
• DOI: http://doi.org/10.1111/rode.12562

REGULAR ARTICLE

Industrial structure and economic performance:

The role of productive public expenditure

Cheng-wei Chang

Department of Economics, Tunghai

University, Taiwan

Correspondence

Cheng-wei Chang, Department of

Economics, Tunghai University, Xitun

Dist., Taiwan Boulevard, Taichung

40704, Taiwan.

Email: d95323010@ntu.edu.tw

Abstract

I consider productive government spending and prefer-

ence for diversity in an imperfectly competitive macroe-

conomic framework, and analyze how differences in

industrial structure affect economic growth and the wel-

fare level. Two main findings emerge from the analysis.

First, the optimal ratio of government spending is related

to the extent of public expenditure externalities and pref-

erence for diversity. Second, the vertical separation

regime leads to a higher economic growth rate and wel-

fare level than the vertical integration regime, provided

that the degree of monopoly power is relatively small.

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INTRODUCTION

The last few decades have witnessed an emerging and growing trend towards market integration in

fast‐growing developing economies. For instance, according to Liu, Qiu, and Zhan (2017), there

were a total of 18,220 merger and acquisition activities involving Chinese firms, including domes-

tic firms acquiring domestic or foreign firms, and foreign firms acquiring domestic firms, during

the period from 1998 to 2014. As indicated by Keller and Shiue (2007), compared with historical

patterns of market integration, contemporary markets are more integrated in China. In addition, by

using a World Bank data set of manufacturing firms in China, Du, Lu and Tao (2012) found that

poorer contracting institutions are important factors causing firms to become more vertically inte-

grated. The industrial pattern of vertical integration is analogously observed in the Indian economy.

By exploring Indian business groups, Khanna and Palepu (2000) found that the affiliates of busi-

ness groups often surpass unaffiliated firms. They further noted that this was due to the prevalence

of large and highly vertically integrated firms in developing countries. Besides, as reported by

Acemoglu, Johnson and Robinso (2003) and Alfaro, Conconi, Fadinger and Newman (2016),

Indian firms have experienced a high degree of vertical integration across more than 200 countries.

Stiebale and Vencappa (2017) used firm–product level panel data for Indian manufacturing firms

from 1989 to 2011, and their results showed that foreign competition plays an important role in

determining whether domestic firms will vertically integrate their activities.

DOI: 10.1111/rode.12562

Rev Dev Econ. 2019;23:745–759. wileyonlinelibrary.com/journal/rode © 2018 John Wiley & Sons Ltd

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