International business alliances: an incomplete contract approach

This paper is an attempt to utilize an incomplete contract approach to expl ain various forms of alliances in international business. We present a simp le model of vertical integration as internalization. It provides theoretica l foundations to understand the multinational enterprise's choice between i nter-firm transactions and intra-firm transactions. In a simple framework, we provide a rationale for joint ventures, original equipment manufacturing (OEM), cross-licensing and divestment by focusing on the subcontractor's i ncentives. Moreover, we discuss transfer pricing and some policies such as incentives, taxation, and local content requirements. (C) 1999 Elsevier Sci ence B.V. All rights reserved. JEL classification: F23; D23; L22.