140-1 Contracting with Enemies?: Vertical FDI with Outsourcing Contracts
- JaeBin Ahn, Jee-Hyeong Park
- sier_140-1.pdf
Abstract
An exploration of Korean MNCs’ foreign affiliate-level data reveals that
a significant portion of manufacturing foreign affiliates sell both to related
and unrelated firms at the same time. We refer to this as hybrid vertical FDI.
We rationalize the presence of hybrid vertical FDI by modifying the otherwise
standard property-rights model of global sourcing with the subsidiary level
option of supplying inputs to unrelated customers in addition to related
firms. Given the positive production externality from serving additional
customers (that is proportional to the MNC’s productivity) and the costs of
getting such benefit (that are increasing in relationship-specificity of the outsourced inputs), the model generates testable hypotheses that are robustly
confirmed by our subsequent empirical analysis.