Quality spillover, tariff, and multinational firms' local sourcing strategies

Abstract

It is prevalent for multinational firms (MNFs) to enter a market by importing products of superior quality, and then engage in local competition with domestic manufacturers (DMs). Alternatively, many MNFs voluntarily expose themselves to the risk of quality spillover by strategically sourcing from DMs to avoid the tariff burden. In this paper, we consider a DM and an MNF that strategically choose whether to source from the DM, and characterize the tradeoff between the tariff burden and the potential loss due to quality spillover. We analyze the supply chain parties' preferences over the MNF's sourcing strategies and the impact of the government's tariff regulation. We show that the MNF prefers domestic sourcing (DS) when the risk of quality spillover is low, while the manufacturer usually sees an opposite preference. However, we find that there exists a win‐win zone where both MNF and DM prefer the MNF's domestic sourcing simultaneously. From the government's perspective, DS always results in more output of high‐quality products, and more social welfare when quality spillover is sufficiently valuable. Interestingly, we find that, even if the quality spillover is limited, more social welfare can be obtained under DS, if the tariff rate is either low or high. The government is hence able to facilitate the incentive alignment between the MNF and the DM by adjusting the tariff regulation, which improves product quality and social welfare in the domestic market, although there exist some danger zones where the regulation is inefficient.

Decision-Making of Transnational Supply Chain Considering Tariff and Third-Party Logistics Service

“…Contrary to the effect of tariff increase, Fan et al [4] pointed out that tariff reduction is beneficial to export enterprises through reduced marginal production costs. Niu et al [5] showed that tariffs imposed by importing countries increase the procurement costs of domestic multinational corporations and reduce the procurement volumes of multinational corporations. Rong and Xu [6] assessed the impact of manufacturer altruistic preferences and government subsidies on the multinational green supply chain under dynamic tariffs.…”

Exclusivity or Competitor Retail? Impacts of Channel Structures on Multinational Supply Chains considering Green Manufacturing

“…Many multinationals move their business to low-tax countries due to cost pressures, Wu and Lu [35] study the effectiveness of the cost-plus or resale price approach to improve multinational earnings. To lower the procurement cost of raw materials, Niu et al [26] investigate the risk of technology spillovers from the local sourcing implemented by the MNMs in a tariff increase setting and confirm that the benefits to the MNMs and the local manufacturers would increase when the risk is low. Many famous raw material suppliers have begun to operate their brand products for more revenue.…”

“…While the entry of large-scale green products into emerging markets helps countries to achieve sustainable development goals [67], the MNMs in emerging markets will face challenges [26,68]. For example, the local manufacturers will compete for the market with a large quantity of low-cost regular goods.…”

“…e former generally refers to a marketing channel configured by a retailer that is solely appointed and only distributes the manufacturer's products within a particular area [24,25], while the latter is related to the channel consisting of domestic competitors [26,27]. Intuitively, the MNM benefits from developing the exclusive channel by assigning an overseas retailer to preserve the pricing power, while the MNM reaps the profits of offering green products to a local competing manufacturer that sells regular products with alternative features, thus lessening competition with the local manufacturer and weakening the market share of the regular product.…”

“Production + procurement” outsourcing with competitive contract manufacturer's partial learning and supplier's price discrimination

“…Niu et al. (2019d) consider a co‐opetitive supply chain where a multinational firm (MNF) strategically sources from a domestic manufacturer when the latter is the MNF's local competitor. Huang et al.…”