Distance and FDI When Contracts are Incomplete

Gianmarco Ottaviano and Alessandro Turrini

No 4041, CEPR Discussion Papers from Centre for Economic Policy Research

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; Trade costs; Incomplete contracts (search for similar items in EconPapers)
JEL-codes: F23 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (8)

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Working Paper: Distance and FDI when Contracts are Incomplete (2002)
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