Manufacturers at successive stages of production may integrate backward upon the sources of raw materials. For instance, a textile unit may take over cotton ginning and yarn spinning units to get smooth supply of raw materials. Backward integration is followed to have a control over the sources of raw materials.

The benefits of backward integration are as under:

(i)    It ensures a regular supply of materials or components.
(ii)    It ensures improvement in quality control over major comments for the final product.
(iii)    It ensures economical use of overhead facilities. The overhead costs go down.
(iv)    It saves indirect taxes payable on the purchase of inputs at different stages.
(v)    it improves the competitive power of the firm. An integrated firm can differentiate itself form its competitors by offering a wide range of value added products.

The limitations of backward integration are as under :

(i)    Huge investment is required for purchasing the sources of raw materials. It may have adverse impact on the production of final product.

(ii)    It renders the firm unable to exploit opportunities of purchasing inputs at lower cost which might emerge in the market form time to time.

(iii)    The existing input producing unit may be using old technology. Its up gradation will require further investment.

(iv)    Market risks are increased. If the final products are not fully sold, all the stages of the firm will suffer.

(v)    Backward integration does not reduce competition in the market.

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