Optimal responses of multinational firms towards non-tariff or tariff barrier: Onshore versus offshore manufacturing

Abstract

Trade barriers are typically provided by emerging economies to impede multinational firms (MNFs) and safeguard their small and medium-sized local firms. So far, it is still unclear how MNFs modify their manufacturing strategies to better manage trade barriers. As a result, this paper systematically examines how MNFs respond to various trade barriers including non-tariff and tariff barriers, where both onshore (ONM) and offshore (OFM) manufacturing are feasible. Three important and intriguing findings of this research can be distilled via the definition of the relative market size. (1) Under ONM, trade barriers do undoubtedly aid in the growth of local firms in emerging economics, and the relative market size can have an impact on the MNF’s marketing strategy. Also, the MNF exhibits a bargaining effect when the relative market size is bigger, meaning that trade barriers will not result in a decline in the MNF’s operational performance. (2) Under either of trade barriers, the MNF can base on the relative market size to select OFM or ONM. That is, when the relative market size is sufficient, the MNF prefers to use ONM to guarantee a stable supply process even while facing trade barriers; otherwise, the MNF is advised to adopt OFM to avoid trade barriers and occupy greater product shares in the emerging market. (3) Regarding emerging economics, trade barriers are advised to be implemented if their local enterprises are not sufficiently developed. And as their local firms become more reliable, trade barriers are ineffective to restraint the MNF since the MNF is willing to shift its production base.