The relationship between the degree of vertical integration and financial performance: A case of the steel industry

Abstract

The goal of the study is to investigate the relationship between the degree of vertical integration and the financial performance of companies in the global steelmaking industry. Research tasks: • Investigate theoretical perspectives on vertical integration; • Examine previous empirical research on vertical integration – financial performance relationship; • Describe the steel industry value chain; • Determine the factors influencing vertical integration decisions in the steel industry; • Conduct an empirical research; • Discuss the obtained findings, research implications and limitations. Research methodology: The empirical study has been conducted on the panel data sample of 32 large steelmaking firms, over the periods 2009-12. By the degree of upstream vertical integration, a firm’s self-sufficiency ratio of the primary raw materials – coal and iron ore. By downstream vertical integration degree, a share of high-value-added products in the total output volume is implied. Financial performance indicators, applied in the study, are operating profit margin, revenue per unit, and cost of goods sold per unit. Research results: The results of the research indicate that there is a negative relationship between the degree of upstream vertical integration and production costs per unit, while there is no association of this parameter with operating profit margins of steelmaking firms. Besides, the findings exhibit that there is a positive association between the degree of downstream vertical integration and the average product price, however, no relationship has been found between the degree of downstream vertical integration and operating profit margin of steelmaking firms.