Divesting or keeping overseas subsidiary production under rising production costs and uncertain market demands in host countries

Abstract

This study examines whether overseas manufacturing subsidiaries are divested or kept under rising production costs and uncertain market demands in their host countries. We predict that even under increasing production costs, a subsidiary will not be divested but kept under high market demand uncertainty. A multinomial logit analysis of Korean overseas manufacturing subsidiaries finds that an overseas manufacturing subsidiary exposed to high labor cost growth in its host country is not divested but kept alive under high market demand uncertainty via cross-border production volume adjustments with other in-network subsidiaries in different countries. It also shows that the moderating impact of demand uncertainty on production shifts over divestment is pronounced more for the subsidiaries with low cross-country labor cost correlation, high product compatibility, and high ownership share. These findings imply that the longevity of subsidiary operations is shaped by geographic and organizational characteristics determining production shift conditions.