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Trade and Intra-Industry Vertical Foreign Direct Investment

Today’s world is highly integrated. Multinationals play a vital role in this integration, especially through global value chains.

Fragmentation in production has become more common as goods are produced in sequential stages in several countries either within the boundaries of the firm (i.e., through subsidiaries) or through arm’s length. The sequential nature of production implies that a good produced in a given country becomes an input for the production of another good in another country, therefore resulting in increased economic interdependence between countries. This project, which is led by Bilgehan Karabay, analyses the relationship between sequentiality of production and the contractual relationship between multinationals (that produce final goods) and their input suppliers. The central focus is on the choice of optimal organizational form that will incentivize optimal effort from different input suppliers at different stages, hence, maximize the value of the final output.