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Information, incentives and multinational firms

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  • Cheng, Chen

Abstract

I present a model that explains a multinational firm's choice of organizational form. If a firm in the developed country outsources the production of its intermediate goods to a supplier in the developing country, it faces an adverse selection problem. If it chooses to produce the intermediate goods in its own subsidiary in the developing country, it faces an inefficient monitoring problem. My analysis of this tradeoff provides a new explanation for the observation that FDI is concentrated in capital intensive industries and yields two empirical hypotheses: more firms should adopt outsourcing instead of FDI after trade liberalization; the share of intra-firm trade in total trade should be increasing in the degree of productivity dispersion across intermediate goods suppliers in the developing country.

Suggested Citation

  • Cheng, Chen, 2011. "Information, incentives and multinational firms," Journal of International Economics, Elsevier, vol. 85(1), pages 147-158, September.
  • Handle: RePEc:eee:inecon:v:85:y:2011:i:1:p:147-158
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    References listed on IDEAS

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    Cited by:

    1. Elias Dinopoulos & Theofanis Tsoulouhas, 2016. "Performance Pay and Offshoring," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 334-369, April.
    2. Sangwha Shin & Carl Davidson, 2020. "Labor market structure and offshoring," Review of International Economics, Wiley Blackwell, vol. 28(4), pages 933-956, September.
    3. Ignatius J. Horstmann & James R. Markusen, 2018. "Learning to sell in new markets: A preliminary analysis of market entry by a multinational firm," Review of International Economics, Wiley Blackwell, vol. 26(5), pages 1040-1052, November.
    4. Cheng Chen, 2015. "Management Quality, Firm Organization and International Trade," 2015 Meeting Papers 53, Society for Economic Dynamics.

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