A few years back, with globalization in full flood “Should I stay or should I go?” was a refrain heard in many boardrooms as leaders decided whether to ‘offshore’ operations to China, India and other low-cost locations. In recent times, not only has globalization come under fire but the efficacy of offshoring has been questioned, and the refrain heard now can often be “Should I come back?”
Research from Emma Brandon-Jones and Brian Squire at Bath School of Management, University of Bath, with Marie Dutordoir and Joao Quariguasi Frota Neto at Alliance Manchester Business School, looks at the pros and cons of ‘reshoring’ and finds that the benefits associated with moving business activities from offshore to domestic locations tend to outweigh the costs. This finding is relevant both for firms faced with the decision of whether to come back, and for policy makers who may seek to further stimulate the reshoring phenomenon.
A Boston Consulting Group study found that by 2015, U.S. companies were already looking at ‘reshoring’ - well before President Trump’s call for “America first.” (Manufacturing job flow to and from offshore has gone from net annual U.S. losses of about 220,000 (2000 to 2003) to a 25, 000 net gain (2016).) In the UK one in six companies ‘reshored’ production between 2010 and 2014, according to a study of almost 300 businesses by the EEF. Last month the Economist reported that uncertainty surrounding Brexit and the weaker pound has triggered an accelerated round of reshoring in Britain.
The determinants of reshoring are many and complex. There are advantages in localizing the supply chain but there are also significant costs to be weighed before making a decision. The value of this new research is that it looks beyond the standard debate about reshoring, the short-term weighing of costs and benefits, and offers a rigorous study of the effects of reshoring on company stock prices and shareholder wealth – the eventual longer-term outcome following reshoring.
Reshoring can potentially enable firms to manage their production capacity and inventory more efficiently and flexibly – allowing production to more closely respond to demand. Also, by reducing communication and transport costs, shortening the supply chain may actually make production cheaper at home than abroad. Furthermore, reshoring can lower the risk of supply chain disruptions and intellectual property theft, and finally there can be a ‘Made in America’ marketing benefit associated with manufacturing at home.
On the other hand many of the cost benefits that caused a firm to relocate its manufacturing or services overseas will still apply and added to these will be new costs associated with a move home. Although the wage gap between domestic and offshore locations may be decreasing, salaries in the U.S. and Western Europe still tend to be several times higher than those in the most popular offshore locations. Moving home can in itself present considerable costs – new factories and facilities might need to be built, new staff hired, and new processes for inventory management created. Finally, there may be currency risk and tax implications associated with a reshoring move.
The researchers point out that “In sum, the direction of the impact of announcements of reshoring decisions on shareholder wealth cannot be determined a priori. It depends on the relative magnitude of the predicted positive and negative cash flow implications of reshoring.” In their research they looked at stock prices and analysed the shareholder wealth effects of 37 reshoring decisions announced by U.S. firms during 2006-2015.
The results indicate that reshoring announcements are associated with a statistically significant positive mean (median) stock price reaction of 0.45% (0.29%). This translates into a mean (median) market value increase of $322.57 million ($31.60 million). The stock market thus seems to recognise that the benefits from relocating production from offshore locations tend to outweigh the costs.
The researchers point to some caveats – the relatively small size of their survey and its focus on short-term stock price movement only. However, the positive shareholder wealth effect resulting from reshoring decisions suggests that ‘high-cost’ regions are sometimes more economically advantageous than ‘low-cost’ locations, once the full costs of the former locations are taken into account. This information can be helpful to firms currently considering “Should I come back?” and to public policy makers who may wish to encourage government and industry-led incentives for reshoring.
Access the research paper: The Impact of Reshoring Decisions on Shareholder Wealth; Emma Brandon-Jones, Marie Dutordoir, Joao Quariguasi Frota Neto, Brian Squire; Journal of Operations Management 49-51 (2017).