The Effect of Reshoring Policy on the Host and Home Countries

Abstract

AbstractThis theoretical study explores how a home country's policies influence where multinational companies choose to produce. The study models subsidy negotiations between firms and both the home and foreign countries, revealing that offering reshoring subsidies might lead to repatriation of the multinational firm. If the host country values job creation's welfare gain from reshoring, a large reshoring subsidy from the home government can be seen as socially acceptable and encourage reshoring. However, if the home governments prioritize job creation less and the foreign government aims to retain the firm, pushing for reshoring may increase costs for the foreign country and reduce its social welfare.KEYWORDS: MultinationalsreshoringoffshoringsubsidyJEL Classifications: F21H25 Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 Examples of government-level reshoring policy promotion or efforts can be found in ‘Bring Jobs Home Act’ (U.S.) and ‘Act on Assistance to Korean Off-shore Enterprises in Repatriation’ (South Korea) etc.2 Most studies related to the threat effect are related to wage negotiations, such as Kwon and Hwang (Citation2018), but some studies are also related to analyzing the threat effect of stringent tax audit policies on overseas relocation of firms (Kwon & Hwang, Citation2019) and of the burden of environmental regulations on overseas relocation (Kwon & Hwang, Citation2021).3 If the representative consumer in each country has the following diversity preference utility function, the demand function shown in the main text can be derived. Here, the following process of deriving the demand function is omitted. (Dixit & Stiglitz, Citation1977; Krugman, Citation1979):4 In a typical Concentration-Proximity framework (Brainard, Citation1997; Helpman et al., Citation2004), a firm's local production entails high fixed costs. However, since this paper considers the withdrawal of firms that already produce locally, fixed costs for local production are already sunk costs at the point of analysis. In real world, when firms repatriate to their home country and expand their existing production facilities, there may be incurred fixed costs. On the one hand, reshoring firms can recover fixed costs by selling production facilities located in foreign country. Thus, net change in fixed costs may be negligible comparing to other fixed costs, and, hence, we assume fixed costs to be zero upon repatriation.5 Fixed costs accompanying production activities are introduced to consider the equilibrium of monopolistic competition in later discussion.6 If the issue of reshoring is analyzed using an oligopoly model instead of a monopolistic competition model, the analytical results would differ due to the different market structures.7 The superscript ‘us’ denotes ‘under subsidy’.8 Firm h can be considered foreign production from the home country’s perspective or local production from the host country’s perspective. We use the terms ‘local’ and ‘foreign’ production depending on the context.9 The concept of equilibrium was proposed by Horn and Wolinsky (Citation1988), and is known as a Nash-in-Nash equilibrium, referencing the Nash equilibrium in Nash bargaining games/solutions. A recent example of a study on international trade adopting Nash-in-Nash equilibrium is Bagwell et al. (Citation2020), which analyzes simultaneous tariff negotiations between three countries.Additional informationFundingThis research was supported by Kyungpook National University Research Fund, 2021.Notes on contributorsChul-Woo KwonChul-Woo Kwon is a professor in the Department of Economics, Kyungpook National University, Daegu, Republic of Korea, and was previously a senior economist of the Bank of Korea. He specializes in the international trade and offshoring.Uk HwangUk Hwang is an economist and a professor in the Department of Economics, Kyungpook National University, Daegu, Republic of Korea. Hwang was previously a research fellow at KEI (Korea Environment Institute). His research interests are political economics and issues of international trade policy implementation.