Return to USA: Impact of Reshoring Announcements and Reshoring Risks on Market Valuation

Abstract

Due to soaring labor and logistics costs in developing countries, various Western firms are “reshoring” some of their offshore operations (performed in-house or outsourced) from foreign countries to their corresponding home countries. Moreover, the acute shortages of respirators and face masks amid the COVID-19 pandemic have triggered more firms to reshore their production to create more jobs and avoid severe shortages of medical supplies. However, the impact of various reshoring announcements on the market response is not well understood.In this paper, we conduct event studies of 272 reshoring announcements (between 2006 and 2018) made by 85 publicly traded United States (U.S.) firms. We find no significant impact of these reshoring announcements on the stock price of the involved firms. However, after incorporating four types of reshoring risks, namely currency risk, development risk, management risk, and geopolitical risk, we find that the market reacts more positively toward reshoring decisions that involve lower management risk, currency risk, and geopolitical risk. We also find that the market reacts more negatively toward reshoring decisions associated with U.S. firms with strong development capabilities (measured in terms of research and development [R&D] investment), probably because reshoring might not be able to create high-paying jobs for local manufacturing workers. We find that the market reacts negatively toward reshoring an operation from China back to the United States, possibly because the market anticipates that reshoring operations back from China would make the firm less competitive due to potential cost increases.