Impact of Channel Co-opetition and Taxes on a Multinational Firm’s Resilient Local Production Decision

Abstract

Relevance: In this article, we focus on the decision of a multinational firm (MNF) on production strategies under the influence of national culture. The national culture of a country can result in a high preference for openness or self-reliance, and such a preference changes over time. The related government policies have a strong impact on the MNF’s decision whether to produce overseas and sell products in the domestic market or produce locally for domestic selling. Theory and methodology: We build a game-theoretical model comprising an MNF and a local retailer to investigate the MNF’s preference for production strategies with the consideration of the influence of national culture. Practice of the research: We find that when the factory establishment variable cost is low and the fixed cost is in a moderate range, the MNF’s preference over production strategies switches twice from local production to overseas production and then back to local production, as the channel substitutability increases. Interestingly, when the factory establishment variable cost is low and the fixed cost is high, the MNF’s preference is heavily dependent upon the tax disparity, exhibiting a threshold policy based on the channel substitutability. Our findings provide important insights for the MNFs into utilizing the national-culture-oriented tax policies and channel substitutability when establishing factories in foreign countries. We also reveal that the preferential local manufacturing policies originated from a high cultural preference for self-reliance may not attract more MNFs, which negatively impacts the policy effectiveness.