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Foreign Market Entry under Incomplete Contracts

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  • Tobias Seidel
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    Abstract

    I show in this paper that incomplete contracts affect a firm’s decision about serving foreign customers through exports or local sales from an affiliated plant. When contracts between two agents within a firm are too costly to write, the share of multinational firms may be higher or lower compared to a world without contractual frictions. Incomplete contracts also provide a novel explanation for why horizontal multinational activity may increase when trade costs fall - a result that is at odds with the proximity-concentration trade-off.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-11/cesifo1_wp3248.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3248.

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    Date of creation: 2010
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    Handle: RePEc:ces:ceswps:_3248

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    Keywords: multinational firms; exports; incomplete contracts;

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    1. Carluccio, J. & Fally, T., 2011. "Global Sourcing under Imperfect Capital Markets," Working papers, Banque de France 312, Banque de France.
    2. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2010. "Intrafirm Trade and Product Contractibility," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 444-48, May.
    3. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262633078, December.
    4. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
    5. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1846, Harvard - Institute of Economic Research.
    6. Fabrice Defever & Farid Toubal, 2007. "Productivity and the Sourcing Modes of Multinational Firms: Evidence from French Firm-Level Data," CEP Discussion Papers dp0842, Centre for Economic Performance, LSE.
    7. Do, Quy-Toan & Levchenko, Andrei A., 2009. "Trade, inequality, and the political economy of institutions," Journal of Economic Theory, Elsevier, Elsevier, vol. 144(4), pages 1489-1520, July.
    8. Corcos, Gregory & Irac, Delphine & Mion, Giordano & Verdier, Thierry, 2009. "The Determinants of Intra-Firm Trade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7530, C.E.P.R. Discussion Papers.
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    10. Kjell Erik Lommerud & Frode Meland & Lars Sørgard, 2002. "Unionized Oligopoly, Trade Liberalization and Location Choice," CESifo Working Paper Series 777, CESifo Group Munich.
    11. repec:hrv:faseco:4784029 is not listed on IDEAS
    12. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 372, Massachusetts Institute of Technology (MIT), Department of Economics.
    13. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(3), pages 552-580, June.
    14. Stephen Ross Yeaple, 2006. "Offshoring, Foreign Direct Investment, and the Structure of U.S. Trade," Journal of the European Economic Association, MIT Press, MIT Press, vol. 4(2-3), pages 602-611, 04-05.
    15. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
    16. Eckel, Carsten & Egger, Hartmut, 2009. "Wage bargaining and multinational firms," Journal of International Economics, Elsevier, Elsevier, vol. 77(2), pages 206-214, April.
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