Conflict management in a multinational firm's production shifting decisions

Abstract

In recent years, many apparel multinational firms (MNFs) have shifted their production from traditional manufacturing bases (e.g., China) to the emerging ones located in Southeast Asia (e.g., Vietnam and Bengal). The interactions among market sizes, MNF's competition with local rival and the global tax rules play key roles in the MNF's decisions. In this paper, we study the preferences of a MNF and its contract manufacturer (CM) over two manufacturing outsourcing structures and investigate whether their objective conflicts can be reconciled. The MNF relies on the CM for production and sells goods in both Chinese and Southeast Asian markets. It is optional for the MNF to use a CM located in China, but has to suffer from the CM's differential prices because of China's partial value-added tax (VAT) refund policy. It is also optional for the MNF to use a CM located in Southeast Asia, resulting in uniform production fee for the goods sold in two markets. The former is traditional outsourcing structure (TS), and the latter is shifted outsourcing structure (SS). Interestingly, we find that, the MNF may first prefer SS, then prefer TS, and back to prefer SS, as the relative market potential between the Southeast Asian market and the Chinese market increases. The CM's preferences may switch twice, too. We identify the opportunities where the preferences of the MNF and the CM are aligned, which are driven by China's partial VAT refund policy.