In this paper we survey the literature of vertical integration and test a model of vertical integration, with emphasis on incentives that from imperfect competition, transactions cost, market variability and technological economy. The test is based on a probit analysis of firms' backward integration choices in a sample of Taiwan automobile industry. The results are consistent with the veritcal integration theroies, and strong support for imperfect competition and transactions cost theory. We also suggest that the Fair Trade Commission should approve the applications of vertical integrations of automobile firms in Taiwan.