Market entry deregulation and corporate vertical specialization: Evidence from China

Market entry deregulation can contribute to a freer and more dynamic market environment. It not only increases entry opportunities for market participants but also has the potential to stimulate multi-node investments by firms in the industry chain. However, the effect of these market changes on the selection of the division of labor mode remains relatively unknown. Leveraging a quasi-experiment on the negative market entry list system, we utilize a staggered difference-in-differences approach to investigate the impact of market entry deregulation on corporate vertical specialization. Our findings robustly demonstrate that market entry deregulation increases corporate vertical specialization. This effect is primarily achieved through the reduction of entry barriers, the increase in sources of information, and the enhancement of the competition mechanism to reduce external transaction costs. Further, this effect is particularly pronounced among firms with higher asset specialization, operating in more competitive industries, and situated in regions with well-developed informatization system. •We explore the impact of market entry deregulation on corporate vertical specialization.•Market entry deregulation has significantly increased vertical specialization.•Lower external transaction cost is the mechanism of rising vertical specialization.•The impact varies at the firm, industry, and regional levels.