Modeling relocation decisions in developed economies

Abstract

Most manufacturing companies in developed countries carry out significant part of their production in countries far away from the headquarters. The main reasons for relocation tend to be the opportunity to save costs and the ability to focus on core functions. However, relocation decisions come with two main consequences. On the one hand, the new manufacturing sites may contribute to the development of the host country through spillovers. On the other hand, innovation performance of the offshoring company may drop, and deterioration of manufacturing may result in ceasing of industrial commons. It is therefore not surprising that while there is a tight competition for FDI in less developed countries, long-term industrial development considerations have been marginal in developed countries or economic areas such as the European Union (EU). Although the EU handles almost a fifth of international trade and majority of EU imports are semi-finished products and parts, even European multinational companies rely in smaller extent on the less developed peripheral regions of the EU, compared to their extra-EU activities.

In our study, we examine a company's relocation decision in terms of production and innovation and evaluate the industry effects of relocation in an economic space. We show that the corporate and industry perspectives lead to different optimum: keeping manufacturing within the borders can bring innovation benefits to the economy in the long run compared to the short-term, cost-oriented approach of the companies. This can be encouraged by providing direct support to economic policy makers, further facilitating domestic transport, or increasing public demand. The results of the model confirm that supporting and protecting supply
chains can bring industry benefits in terms of innovation and catching up and can also reduce the risks coming from the complexity and inflexibility of supply chains. The latter may be a particularly important aspect in the transformation of global value chains due to the coronavirus epidemic, in the redesign of supply chains, which may also require a more active engagement from major economic actors and policymakers.