A Moral Hazard Model of a Multinational Firm's Decision between Foreign Direct Investment and International Subcontracting

• Type: Another Publication in an International Scientific Journal
• Date: 2007

Authors

Rosa Maria Forte (Author) FEP; António Brandão (Author) FEP

Journal

Title: Multinational Business Review

Vol. 15 No. 3

Pages: 79-104

ISSN: 1525-383X

Publisher: Emerald

Indexing

Scopus - 2 Citations

Other information

Authenticus ID: P-00K-G8M

DOI: 10.1108/1525383x200700013

Abstract (EN): This paper develops a moral hazard model applied to a multinational firm's decision between foreign direct investment and international subcontracting. We compare the results of the moral hazard model, characterised by the fact that the multinational firm cannot control the operations performed by the subcontractor firm, with the traditional model of symmetric information. We conclude that the uncertainty associated with the subcontractor firm's behaviour, despite increasing the multinational firm's preference to engage in foreign direct investment, does not change its optimal decision, which is to subcontract. The exception occurs when the subsidiary stands as more efficient than the subcontractor firm. © 2007, Emerald Group Publishing Limited

Language: English

Type (Professor's evaluation): Scientific