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Asymmetric Information and Global Sourcing

  • Shin Chen Huang
  • Chia Hui Lu

This paper aims to study the choice of offshoring modes made by multinationals in the presence of asymmetric information. We focus on two types of asymmetric information, namely hidden characteristics and hidden action. The former creates adverse selection problem, and the later leads to moral hazard problem, both of which incur non-trivial costs to multinationals. We show that different offshoring modes, including greenfield foreign direct investment, joint venture, and outsourcing, can serve as a means to overcome or mitigate the problem of information asymmetry. We study the conditions under which one particular type of offshore modes dominates the others. The model generates implications consistent with the patterns of the prevalence of various offshoring models over time, and across industries and countries.

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File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd09-067.pdf
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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd09-067.

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Date of creation: Apr 2009
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Handle: RePEc:hst:ghsdps:gd09-067
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