Technology and Firm Size Across Industries: Theory and Evidence from Chinese Manufacturing Sectors

Abstract

This paper examines how technology affects firm size. A vertical integration perspective is taken because the size of a firm tends to be large when a longer chain of production processes are organized within the border of the firm. By applying the Property Rights Theory Approach, the paper establishes that vertical integration is more likely in more capital-intensive industries whereas labor-intensive intermediate goods are more likely to be produced by independent firms. It then uses firm-level data for Chinese manufacturing sectors to test the relationship between firm size and factor intensity and finds that firms in more capital-intensive industries are indeed larger than those in more labor-intensive industries. These results are robust even after including age and other additional controls.