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Distance and FDI When Contracts are Incomplete

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  • Ottaviano, Gianmarco Ireo Paolo
  • Turrini, Alessandro Antonio

Abstract

We introduce incomplete outsourcing contracts in an otherwise standard model of MNEs based on the trade-off between proximity and concentration. This has implications for the choice between export and FDI and the way this is affected by the distance between source and host countries. In particular, incomplete outsourcing contracts can account for the observed emergence of FDIs in large markets not only when trade costs are large but also when trade costs are small. Moreover, contractual incompleteness alters someway dramatically the choice of supply mode made when contracts are complete.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4041.

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Date of creation: Sep 2003
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Handle: RePEc:cpr:ceprdp:4041

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Keywords: foreign direct investment; incomplete contracts; trade costs;

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  1. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  2. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
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  5. Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing Versus FDI in Industry Equilibrium," CEPR Discussion Papers 3647, C.E.P.R. Discussion Papers.
  6. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," NBER Working Papers 8728, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Valeria Gattai, 2005. "Dissipation of Knowledge and the Boundaries of the Multinational Enterprise," Working Papers 2005.121, Fondazione Eni Enrico Mattei.
  2. Marin, Dalia & Thierry, Verdier, 2007. "Power in the Multinational Corporation in Industry Equilibrium," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 209, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Valeria Gattai, 2006. "From the Theory of the Firm to FDI and Internalisation: A Survey," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 225-262, November.
  4. Marcella Nicolini, 2007. "Institutions and Offshoring Decision," CESifo Working Paper Series 2074, CESifo Group Munich.
  5. Arti Grover, 2005. "Outsourcing Versus Foreign Direct Investment--A Welfare Analysis," Working papers 140, Centre for Development Economics, Delhi School of Economics.

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