Impact of Channel Co-opetition and Tax on a Multinational Firm's Local Production Decision

Abstract

Relevance: In this paper, we focus on the decision of a multinational firm (MNF) on local production under the influence of national culture. The national culture of a country can result in a high preference on openness or self-reliance, and such preference changes over time. This cultural preference and related government policies have a strong impact on the MNF's decision whether to produce overseas and sell products in the domestic market or produce locally for domestic selling.
Theory and methodology: We build a game-theoretical model comprising of a MNF and a local retailer, to investigate the MNF's preference on local production decision with the consideration of the influence of national culture. Practice of the research: We find that, when the factory establishment cost is in a moderate range, the MNF's preference over production strategies switches twice from local production to overseas production and then back to local production, as the competition intensity increases. Interestingly, when the factory establishment cost is high, the MNF's preference is heavily dependent upon the tax disparity, exhibiting a threshold policy based on the competition intensity. Our findings provide important insights for the MNFs into utilizing the national culture-oriented tax policies and channel competition when establishing factories in foreign countries. We also reveal that the preferential local manufacturing policies originated by high cultural preference on self-reliance may not attract more MNFs, which negatively impacts the policy effectiveness.

Keywords: National culture; transfer pricing; co-opetitive supply chain; tax planning.