Incomplete Contracts in Global Sourcing

To better understand why firms organize production on a global scale, new theoretical approaches have been designed with growing interest aroused from the fast development world economy (Antràs and Helpman, 2007). Incentives that drive firms to international source vary a lot. A lower cost for long-distance transmittance and processing of information resulted from the development and popularity of internet is regarded to be one of them (Antràs, 2011). The Question is how firm making choices between vertical integration and outsourcing. On one hand, globalization and removal of trade barriers allow an easier direct investment in foreign countries, which may results in enhancing the intra-firm trade. On the other hand, with the reduced cost of service connection among remote locations, such as the cost of transportation, information-exchange media and telecommunications, arm’s-length of trade may be increased (Fukasaku and Kimura, 2001). To further discuss this topic, an empirical research has been conducted on the basis of U.S. data. The sourcing strategies of U.S. MNCs have been vividly revealed through the data both by trading partner and industry. Moreover, an indispensable issue in global sourcing in which goods and services are exchanged is definitely the contracts with agents or manufacturers who are located in countries with various laws and cultures (Antràs, 2011). As one of the most important factors, incomplete contracts are the one that being focused on in this paper. There is no doubt that contractibility influences the decisions on organization forms. However, to figure out how firms react to contractual problems, it is necessary to analyze the types of products facing the contractual incompleteness