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Foreign Market Entry Under Incomplete Contracts

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  • Tobias Seidel

Abstract

type="main" xml:id="twec12256-abs-0001"> This paper shows that incomplete contracts serve as a determinant of the mode of foreign market entry – that is exports versus foreign direct investment (FDI). When contracts between two agents within a firm are too costly to be written, the share of multinational firms may be higher or lower compared with a world without contractual frictions. The direction of change depends on the technologically required relative contribution of headquarter services in the joint production process. For example, in industries that use more inputs from the management unit as compared to inputs from a component supplier, the share of firms engaging in foreign direct investment is higher than under complete contracts. This effect may be so strong that the share of multinational firms increases in trade freeness.

Suggested Citation

  • Tobias Seidel, 2015. "Foreign Market Entry Under Incomplete Contracts," The World Economy, Wiley Blackwell, vol. 38(6), pages 899-912, June.
    • Handle: RePEc:bla:worlde:v:38:y:2015:i:6:p:899-912
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    File URL: http://hdl.handle.net/10.1111/twec.2015.38.issue-6
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