Working Paper: CEPR ID: DP4041
Authors: Gianmarco I.P. Ottaviano; Alessandro Turrini
Abstract: We introduce incomplete outsourcing contracts in an otherwise standard model of MNEs based on the trade-off between proximity and concentration. This has implications for the choice between export and FDI and the way this is affected by the distance between source and host countries. In particular, incomplete outsourcing contracts can account for the observed emergence of FDIs in large markets not only when trade costs are large but also when trade costs are small. Moreover, contractual incompleteness alters someway dramatically the choice of supply mode made when contracts are complete.
Keywords: foreign direct investment; incomplete contracts; trade costs
JEL Codes: F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| incomplete outsourcing contracts (D86) | choice of supply mode (FDI vs. exports) (F23) |
| contractual incompleteness (D86) | nonlinear relationship between distance and FDI (F21) |
| distance (R12) | FDI (F23) |
| trade costs (F19) | FDI attractiveness (F23) |
| large trade costs (F12) | proximity considerations favoring FDI (F23) |
| small trade costs (F19) | outside option effect enhancing attractiveness of outsourcing (L24) |
| market size (L25) | effectiveness of FDI (F23) |