اطلاعات، مشوق ها و شرکت های چند ملیتی

I present a model that explains a multinational firm's choice of organizational form. If a firm in the developed country outsources the production of its intermediate goods to a supplier in the developing country, it faces an adverse selection problem. If it chooses to produce the intermediate goods in its own subsidiary in the developing country, it faces an inefficient monitoring problem. My analysis of this tradeoff provides a new explanation for the observation that FDI is concentrated in capital intensive industries and yields two empirical hypotheses: more firms should adopt outsourcing instead of FDI after trade liberalization; the share of intra-firm trade in total trade should be increasing in the degree of productivity dispersion across intermediate goods suppliers in the developing country.

Recent years have witnessed rapid growth of Foreign Direct Investment (FDI).1 With the rapid growth of FDI, intra-firm trade has become an important feature of international trade.2 FDI and intra-firm trade are conducted by Multinational Enterprises (MNEs) which play a key role in the international economy today.3 Other than FDI, MNEs can outsource production by buying intermediate goods from independent suppliers in the developing country. Outsourcing has expanded dramatically in the past two decades, especially in the form of international trade of intermediate goods.4 In the comparison between FDI and outsourcing, there is one important finding from the empirical work, “intra-firm trade (FDI) is heavily concentrated in capital-intensive industries.”5 This is an interesting phenomenon which some trade economists have tried to explain. In the seminal work of Antràs (2003b), he uses the incomplete contract theory6 to explain this empirical finding.7 Because of the incompleteness of contracts between the MNE in the developed country and the intermediate goods supplier in the developing country, the hold-up problem appears. Consequently, both sides underinvest. In capital-intensive industries, the investment of the MNE's input becomes more important compared with the intermediate goods suppliers. Thus, the MNE wants to integrate the intermediate goods supplier to increase its incentive to invest. As a result, the loss of efficiency will be alleviated in the capital-intensive industry, if the MNE integrates the intermediate goods supplier in the developing country. Although the work of Antràs (2003b) sheds important light on the problem of MNEs' organizational choice, there are other relevant factors that have not been studied very much in the previous literature. Among these is the asymmetric information problem concerning the southern suppliers' products. In 2007, it was reported that toys contaminated with toxic levels of lead were found among exports from China to the U.S.8 At the beginning of 2008, dumplings exported to Japan from the Chinese food corporation Tianyang were found to be poisonous.9 The most recent and serious case is the melamine-tainted milk-powder crisis in September 2008. Sanlu and other related firms included melamine which is cheaper than other components of the milk-powder into their products and sold them at high prices. All above cases point out one important issue in international trade, which is the asymmetric information problem regarding the quality of products exported from developing countries.

I have presented a simple model using contract theory to explain the behavior of multinational firms. The main idea is that if the production of intermediate goods is labor-intensive, the MNE should not use integration to overcome the adverse selection problem. This is because the inefficient monitoring problem in the FDI case becomes more serious. Consequently, the MNEs should integrate southern suppliers to produce capital-intensive intermediate goods and outsource the production of labor-intensive intermediate goods to stand-alone southern suppliers. This paper contributes to the theory of multinational firms in the following ways. First, this paper points out one significant concern of the MNEs in reality: southern managers' work incentive. I believe this paper is one of the few papers addressing this important issue in a formal way.40 Second, the information problem is treated as the disadvantage of engaging in outsourcing in this paper. This point has been somewhat overlooked by previous research. Third, this paper also explores the inner structure of MNEs, which needs much more research in the future. The new theoretical mechanism based on the information asymmetry proposed in this paper points to the need for more empirical work to clarify the determinants of MNEs' cross-border organizational choices. For example, one can expect that outsourcing should be commonly seen in developing countries that have better accounting systems, because better accounting systems alleviate the uncertainty surrounding southern suppliers' productivity. In addition, the degree of southern suppliers' productivity dispersion is also a significant factor for northern firms to consider when they choose the organizational form of the intermediate goods production. Undoubtedly, much more research remains to be done. Incorporating the above model into a general equilibrium framework is expected to reveal more implications regarding the output of MNEs' subsidiaries relative to outsourcing partners and the share of intra-industry trade among others. It is also worth extending this model into a dynamic setup, which possibly can shed light on the resolution of asymmetric information problems in the South. One rough conjecture is that repeated transactions between MNEs and southern suppliers should alleviate the asymmetric information problem and hence favor outsourcing instead of FDI.