Effects of Adverse Selection on a Multinational Firm’s Decision on where to Subcontract
This paper analyses the effects of adverse selection on a multinational firm’s decision on where to subcontract. Adverse selection arises since subcontractor firms have more information than the multinational concerning their production costs. The results obtained show that adverse selection confers to subcontractor firms an advantage in their relationship with the multinational, inducing the multinational to subcontract in more than one country. In this way, adverse selection modelling outcomes justify, and are coherent with, the empirical evidence such as, the diversity of countries that multinational firms subcontract and the fast production relocation between countries.
Keywordsinternational subcontracting adverse selection location
JEL ClassificationD82 F23 L24
Unable to display preview. Download preview PDF.
- Feenstra, R., “Integration of trade and disintegration of production in the global economy,” Journal of Economic Perspectives, vol. 12(4), pp. 31–50, 1998.Google Scholar
- Graziani, G., “International subcontracting in the textile and clothing industry,” in Sven, A. and Henryk K. (eds.), Fragmentation—New Production Patterns in the World Economy. New York (Oxford University Press), 2001.Google Scholar
- Macho-Stadler, I. and Pérez-Castrillo, D., An Introduction to the Economics of Information. Oxford: Oxford University Press, 1997.Google Scholar
- Park, H., Reddy, S., and Sarkar, S., “Make or buy strategy of firms in the U.S.,” Multinational Business Review, Fall, pp. 89–97, 2000.Google Scholar
- Porter, M. E., Competitive Advantage—creating and sustaining superior performance. The Free Press: New York, 1985.Google Scholar
- Tempest, R., “Barbie and the world economy” The Los Angeles Times, September 22, p. 1, 1996.Google Scholar
- UNCTAD—United Nations Conference on Trade and Development, World Investment Report: Transnational Corporations and Export Competitiveness. New York and Geneva: United Nations, 2002.Google Scholar
- UNCTAD—United Nations Conference on Trade and Development, World Investment Report: FDI Policies for Development: National and International Perspectives. New York and Geneva: United Nations, 2003.Google Scholar
- WTO—World Trade Organization, Annual Report 1998. Geneva: World Trade Organization, 1998.Google Scholar