Foreign Market Entry Under Incomplete Contracts

14 Pages Posted: 22 Jun 2015

See all articles by Tobias Seidel

Tobias Seidel

University of Duisburg-Essen - Mercator School of Management

Date Written: June 2015

Abstract

This paper shows that incomplete contracts serve as a determinant of the mode of foreign market entry – that is exports versus foreign direct investment (FDI). When contracts between two agents within a firm are too costly to be written, the share of multinational firms may be higher or lower compared with a world without contractual frictions. The direction of change depends on the technologically required relative contribution of headquarter services in the joint production process. For example, in industries that use more inputs from the management unit as compared to inputs from a component supplier, the share of firms engaging in foreign direct investment is higher than under complete contracts. This effect may be so strong that the share of multinational firms increases in trade freeness.

Suggested Citation

Seidel, Tobias, Foreign Market Entry Under Incomplete Contracts (June 2015). The World Economy, Vol. 38, Issue 6, pp. 899-912, 2015. Available at SSRN: https://ssrn.com/abstract=2621103 or http://dx.doi.org/10.1111/twec.12256

Tobias Seidel (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

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