Distance and FDI when Contracts are Incomplete

We introduce incomplete outsourcing contracts in an otherwise standard model of MNEs based on the trade-off between proximity and concentration. This has both positive and normative implications. As to the former, incomplete outsourcing contracts can account for the observed emergence of FDIs in large markets not only when trade costs are large but also when trade costs are small. As to the latter implications, contractual incompleteness alters someway dramatically the choice of supply mode made when contracts are complete.