Multinational Enterprises as Guarantors of Product Quality

In a market subject to producers' moral hazard arising from unobservable product quality, guaranteeing quality by individual producers may require high reputational rents when the cost of production fluctuates. Multinational enterprises (MNEs) operating in a multiple number of countries have less incentives to cheat because cheating in one country costs the MNEs the loss of reputation in other countries. Thus, MNEs may produce high quality at a lower quality premium than local independent firms in each country. This paper also shows that MNEs possessing firm-specific assets with public good nature may fully collect the rents accruing to the assets through arm's length agreement when certain conditions hold.