An Investigation of Contractual Structure in International Business

The literature on international business has traditionally investigated two major areas. One area deals with the question of, « Why do firms engage in international business ». The other area tries to answer questions such as « Which arrangements do firms choose far their investments? » and « Why are some arrangements chosen over others? ». Economic theory helps in outlining general tendencies, but the existing literature and empirical studies have not satisfactorily answered these questions. The author deals with the second area by exploring contractual arrangements in international impertinent, focusing on the problem of technology transfer across national boundaries. A principal agent model is analyzed in which a firm must decide between a wage contract, a rent contract and a share contract as a mode of operation. Optimal contractual arrangements are characterized and comparative static exercises are undertaken. This work establishes results that are consistent with the observations iii international business arrangements. One such result is that, wholly-owned subsidiaries are likely to prevail in industries that are capital-intensive and capital-sensitive. Other results include a clear prediction on how contractual arrangements vary as agent’s ability to provide the inputs change. The model could be extended to embody more than two agents, with differential abilities at providing the inputs, and multiple technologies. This would be useful in addressing concerns of the first area, such as the existence of multinational firms. Introducing this heterogeneity in the model would lead to explanations of the predictions on the heterogeneity in contractual structure in seemingly similar areas.