Plant location and inventory level decisions in global supply chains: Evidence from Korean firms

Abstract

We investigate how firms make plant location and inventory level decisions to serve global markets. In our analysis, we consider not only differences in wages, transportation costs, and subsidies across countries but also exchange rate changes and competition between firms. We show that the degree of risk exposure of firms and the benefit of relocating plants to the final consumption market play a critical role in firms’ plant location decisions, especially when the global economy is highly uncertain. We provide conditions under which a firm relocates its plant from one country to another, and empirically validate the results. We then investigate how a firm manages inventory when its plant is located in a foreign country. We model and show that firm’s inventory level depends on currency exchange rates and transportation costs when the firm imports products. We empirically confirm the predictions of the theory by using a unique firm-level dataset drawn from Korean firms.