Vertical scope and location decisions in captive offshoring: evidence from US manufacturers in Mexico

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Purpose This paper aims to examine how a firm’s vertical scope influences its location preference for captive offshoring. The author contributes to an emerging offshoring literature with a deeper conceptualization and empirical understanding of the interplay between a firm’s vertical integration and location strategies in a host country. Design/methodology/approach Our empirical study focuses on US firms establishing manufacturing plants in Mexico. The primary data comes from Dun and Bradstreet WorldBase, which consists of 562 manufacturing plants owned by US companies that first entered Mexico after the passage of the North American Free Trade Agreement. Following previous work in international business, the author uses a conditional logistic regression in our primary empirical analysis. Findings Firms with vertically integrated activities in their home country are more likely to establish foreign subsidiaries with vertically integrated operations when offshoring their home activities. These firms are also more likely to locate outside industrial clusters than non-integrated firms in the host country. The results suggest that vertically integrated firms substitute internal resources for external resources and derive fewer benefits from industrial agglomerations. Originality/value This paper contributes to the international business literature, practice and public policy. Unveiling an interplay between vertical scope and location choice extends our knowledge and helps managers craft these strategic decisions more effectively. This paper also offers valuable insights for assisting governments in better matching potential foreign investors to regions with diverse levels of industrial development.