Examining the Dynamics of Vertical Integration Strategies: Implications for Inventory Performance and Supply Chain Positioning

This study examines how vertical integration (VI)—specifically forward integration (FI) and backward integration (BI)—affects inventory performance (IP) and how this relationship depends on a firm's position in the supply chain. Using panel data from Chinese manufacturing firms listed on the Shanghai and Shenzhen stock exchanges from 2007 to 2018, we analyze the effects of VI strategies on different types of inventory. The results show that FI improves the performance of finished goods inventory, whereas BI enhances the management of raw materials inventory. Further analysis indicates that downstream firms benefit more from BI, while upstream firms gain greater advantages from FI. Drawing on Transaction Cost Economics and the Resource-Based View, we explain how VI helps firms reduce coordination costs and leverage internal capabilities to improve inventory efficiency. To ensure the robustness of our findings, we conduct several additional tests, including instrumental variable estimation, regression analyses by inventory type, subgroup analyses of upstream and downstream industries, and alternative measures of inventory performance. The results remain consistent across these tests. These findings contribute to the literature on vertical integration and supply chain management and provide practical guidance for firms seeking to align VI strategies with their supply chain position to improve inventory efficiency.