Incomplete Contract And The Selection Of Multinational Production Organization Mode

In recent years, in the process of rapid development of globalization, there are exist many, especially the following three phenomena in the field of international trade and investment:First, in the global value chain dominated by multinational companies, world FDI and the trade of intermediate goods had been developed rapidly; Second, FDI and intermediate regional imbalances in the distribution of goods trade; Third, the contract implementation systems between countries and regions are very different. Based on the above phenomena, we summed up the characteristics of FDI and intermediate goods trade:the superior contract system tend to attract more investment and more trade in intermediate goods. Today’s world has become a "global village", the economy among countries are closely linked to each other, and foreign investment and participation in international outsourcing are very important for every countries’economy, especially for developing countries’. So, why the international investment and intermediate goods trade will exhibit the above characteristics? We know that, contemporary international vertical specialization (or division of labor within the product) is dominated by multinational corporations. Therefore, to clarify this feature lies in the understanding of multinational production organization mode decision problem. This decision problem consists of two aspects: First, organizational boundaries decision-making, that is, the classic "make or buy": For the desired intermediate inputs, companies choose to outsource from other companies (to buy) or make them itself through vertical integration? The second, Location decisions, that is, companies have to choose a place looking for outsourcing partner, or investment vertically to integrated production.Traditional theory is relatively weak for interoperating the problem:First of all, the traditional economic theory abstract of the production process of the enterprise, saw the enterprise as a "black box"; Secondly, the traditional trade theory abstract production organization mode, assume that the entire production process happens in just one country, in accordance with the principle of comparative advantage, or even if it comes to the analysis of intermediate goods, it is only decomposes the final products of some intermediate goods with different factor intensity, then it will be analyzed in the framework of comparative advantage that how the production of these intermediate goods distributed in countries with different resource endowments. Finally, both the traditional economic and trade theory implies the assumption of complete contract, and that both companies that had signed the contract will be able to fully perform in accordance with the parties’ intentions. They did not consider the contract friction’s impact on businesses.Bora in the20th century,80-90years, incomplete contract theory provides us with the idea of an analysis of the problem. To explain this problem, this paper established a mathematical model based on incomplete contract theory, and tested the main conclusions of the mathematical model by using the multinational panel data and inter-provincial panel data of China.In this article, based on incomplete contract theory, we established a South-North bilateral open economy theoretical model from the perspective of property rights theory (GHM) and transaction costs theory (TCE). By the analysis of the multinational production organization mode selection, we focus on the effect of the progress of the contract implementation system in southern countries on its undertaking of northern enterprises’offshore production. In addition, in the TCE framework, we also divided the effect of the progress of the contract implementation system in southern countries into "extended marginal" and "intensive margin".The main conclusions of the theoretical part of this article are as follows:First, a capital-intensive production tend to take the form of integration, when production of labor-intensive products often takes the form of outsourcing organization. Second, the improvement of contractual delivery system of the southern countries can promote the undertaking of international outsourcing or FDI, and the promotion is stronger for the industry of higher contract intensity. Third, the progress of contract implementation system in southern countries can increase the tendency of the enterprises in northern countries to shore in the southern countries, which is the extended marginal; and the effect is stronger in higher contract intensity industry. Fourth, the progress of the contract the implementation system in southern countries is able to increase the intermediate goods production enterprises, which is the intensive margin. Fifth, the reduction of the wage level of southern countries can promote the offshore production of the northern enterprises in southern countries, and the promotion is more obvious for the greater contract intensity industries.On the basis of theoretical analysis, respectively, using cross-country data and inter-provincial panel data, we make an empirical analysis for the relationship between contract implementation system and FDI or international outsourcing.The empirical results based on multinational sample are:First, contract implementation system has a significant and symbolic effect in promoting FDI, and the conclusion still holds after controlling of the endogenous and other potential problems. Second, to further examine the contract implement system’effect on different levels of FDI, we also use quantile regression. And the results show that the effect of contract implement system on promoting the higher level of FDI is more obvious.The empirical results based on China’s inter-provincial panel data are that:1. Overall, contract implementation efficiency progress has a significant and robust role in promoting FDI and outsourcing; As a measure of economies of scale and the market thickness, GDP’s role in promoting FDI and outsourcing is also very significant; lower wage levels and sound infrastructure also work on FDI and outsourcing, but this effect is not robust.2. View from different levels of FDI and outsourcing, the higher of those levels, the stronger of sub-contract effective’s role plays, but the weaker of GDP, wage levels and infrastructure’s role paly. This shows that with the regional economic development, FDI and outsourcing have reached a certain level, only "bonus system" works, and the role of "hard power" like the "demographic dividend" and infrastructure has become very weak.