The Effect of Recessions on Firms’ Boundaries

The economic theory of the firm offers conflicting predictions of how the two major effects of recessions, changes in demand and access to credit, affect firm boundaries. Using data on Norwegian firms in the recent recession, we find support for both increased and reduced vertical integration of core activities in response to a recessionary shock. Further, we find a negative interaction effect between reductions in access to credit and reductions in demand on insourcing of core activities, but no such effect on outsourcing of core activities. We argue that this finding may highlight a possible explanation for the conflicting theoretical predictions regarding vertical integration in response to demand and credit shocks.