Foreign Direct Investments and trade in agriculture: an incomplete contracts approach

Despite the attention given in recent years to the growth of foreign land acquisitions, there have been few studies investigating the pattern of recent Foreign Direct Investment (FDI) in agriculture and the ones that have are mostly focused on the locational drivers of FDI. This paper explores how the contractual features of transactions of agricultural products affect the “internalization” decision of firms, that is, the choice trade/FDI. The paper develops a partial equilibrium model incorporating incomplete contracts and asset specificity, which is used to address a number of questions: What is the impact of the quality of the institutions on the choice trade/FDI? How may the bargaining power of the downstream and upstream firms affect the outcome? How is the choice FDI/trade affected by the presence of a state–owned firm? The model provides some uncommon results, such as the finding that when the investor is private, weak institutions may promote FDI.