Vertical Integration and Firm Resilience Under Systemic Stress: Evidence from the COVID-19 Pandemic

Abstract

This paper investigates whether vertical integration confers operational resilience against systemic supply-chain disruptions. In capital-intensive industries with inelastic short-run supply, vertical integration trades coordination flexibility for cost rigidity: centralising production reduces contracting frictions but locks firms into fixed costs that are difficult to adjust when market conditions shift. Using a panel of publicly traded semiconductor firms (2012–2025), I exploit the COVID-19 pandemic as an exogenous shock to estimate differential responses in inventory, costs, and gross margins across organisational forms via a difference-in-differences design. I complement this analysis with an event study of abnormal returns around the WHO pandemic declaration. IDMs show no significant differential inventory or cost response, but experience marginally greater gross margin compression than fabless firms, consistent with fixed fabrication costs imposing a performance penalty when output is insufficient to absorb them. This effect is concentrated in comparisons with large fabless firms, suggesting that scale and bargaining power mediate resilience outcomes in addition to organisational form itself. Equity markets transiently assigned IDMs a resilience premium around the pandemic declaration before correcting within two days, ahead of observable firm-level outcomes. These findings contribute to transaction cost and property rights theories, and offer empirical grounding for ongoing policy debates over vertical integration as a supply chain resilience strategy.