Abstract
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.
Similar content being viewed by others
References
Abraham, K. and Taylor, S., “Firms’ use of outside contractors: Theory and evidence,” Journal of Labor Economics, vol. 14(3), pp. 394–424, 1996.
Das, S., “Direct foreign investment versus licensing,” Review of Development Economics, vol. 3(1), pp. 86–97, 1999.
Donaghu, M. and Barff, R., “Nike just did it: International subcontracting and flexibility in athletic footwear production,” Regional Studies, vol. 24(6), pp. 537–552, 1990.
Feenstra, R., “Integration of trade and disintegration of production in the global economy,” Journal of Economic Perspectives, vol. 12(4), pp. 31–50, 1998.
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.
Grossman, G. and Helpman, E., “Outsourcing in a global economy,” Review of Economic Studies, vol. 72(1), pp. 135–159, 2005.
Macho-Stadler, I. and Pérez-Castrillo, D., An Introduction to the Economics of Information. Oxford: Oxford University Press, 1997.
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.
Porter, M. E., Competitive Advantage—creating and sustaining superior performance. The Free Press: New York, 1985.
Swenson, D., “Overseas assembly and country sourcing choices,” Journal of International Economics, vol. 66, pp. 107–130, 2005.
Tempest, R., “Barbie and the world economy” The Los Angeles Times, September 22, p. 1, 1996.
UNCTAD—United Nations Conference on Trade and Development, World Investment Report: Transnational Corporations and Export Competitiveness. New York and Geneva: United Nations, 2002.
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.
Vining, A. and Globerman, S., “A conceptual framework for understanding the outsource decision,” European Management Journal, vol. 17(6), pp. 645–654, 1999.
Walker, G. and Weber, D., “A Transaction cost approach to make-or-buy decisions,” Administrative Science Quartely, vol. 29, pp. 373–391, 1984.
WTO—World Trade Organization, Annual Report 1998. Geneva: World Trade Organization, 1998.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Forte, R., Brandão, A. Effects of Adverse Selection on a Multinational Firm’s Decision on where to Subcontract. J Ind Compet Trade 8, 133–146 (2008). https://doi.org/10.1007/s10842-007-0014-x
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10842-007-0014-x