Unraveling the Myth of Reshoring: Managers’ Strategic Decisions about Global Manufacturing Location

Abstract

This paper investigates the industrial practices of production offshoring and reshoring — in particular, the role of strategy and natural hedging (i.e., co-locating sales and production activities). After analyzing the recent production sourcing decisions of 74 leading global manufacturing firms, we conclude that firms tend to hedge naturally by matching sales with production volume in most regions. We identify the six decision strategies most often followed: agility, supply, proximity, innovation, energy & fixed cost, and policy & risk. In choosing one of these as its dominant strategy, the firm trades off value creation against risk mitigation through natural hedging. Some of the firms in our sample deviate considerably from natural hedging by investing primarily where goods are produced and only secondarily where those goods are sold. We further observe an investment behavior that reflects biases favoring investment at home and in rapidly developing markets. Finally, we discover that firms committed to any one of the six strategies achieve significantly greater gains than do uncommitted firms; in particular, their rate of performance improvement doubles yet their risk exposure does not increase by more than 30%.

Keywords: manufacturing location decisions, offshoring, reshoring, manufacturing strategy, performance, natural hedging

JEL Classification: M11