DP4041 | Distance and FDI When Contracts are Incomplete

Publication Date

23/09/2003

JEL Code(s)

Keyword(s)

Programme Area(s)

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.