Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73434
Authors: 
Kukharskyy, Bohdan
Year of Publication: 
2012
Series/Report no.: 
BGPE Discussion Paper 129
Abstract: 
This paper presents econometric evidence for a link between a country’s level of egalitarianism and its inward foreign direct investment. In order to provide a theoretical rationale for this relationship, I embed Hart and Moore’s (2008) novel contractual foundation into a simple model of global sourcing with culturally dissimilar countries. Entrepreneurs can cooperate with foreign suppliers under two contractual modes: rigid and flexible. If suppliers consider original contracts as reference points and future is uncertain, a fundamental tradeoff arises between these two modes. By stipulating a range of possible outcomes, a flexible contract allows for future adaptation but is associated with ex post haggling cost. By specifying a single outcome, a rigid contract eliminates future disagreement but precludes beneficial adjustments to the occurring shocks. The key message of this paper is twofold: Due to lower haggling cost, the degree of contractual flexibility is higher in egalitarian countries. If future is uncertain, these countries are more attractive for international investors than less egalitarian ones.
Subjects: 
Foreign direct investment
cross-country cultural differences
egalitarianism
risk
contracts as reference points
haggling
contractual rigidity vs. flexibility
JEL: 
D03
D23
D63
F23
L23
Document Type: 
Working Paper

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