Outsourcing as a Risk Management Mechanism for Domestic Manufacturing Capacity Investment

Nikolay Osadchiy, Shi Qiu and Sridhar Seshadri

Foundations and Trends(R) in Technology, Information and Operations Management, 2024, vol. 18, issue 1, 84-102

Abstract: We propose two perspectives on the shift from U.S. domestic manufacturing to Asia in 1990–2011: production cost arbitrage and the management of supply-demand mismatch. In our model, a firm facing demand uncertainty decides between investing in domestic or overseas production capacity. The model predicts greater investment overseas when the cost arbitrage is high, switching cost is low, demand volatility is high, and the systematic risk in demand is above a certain threshold. Empirically, we observe strong support for the cost arbitrage motive in 1990–2000 and the risk management motive in 2001–2011, i.e., after China’s entry into the WTO. We estimate that investing into risk mitigation could have saved more than 400,000 U.S. manufacturing jobs.

Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1561/0200000114-4 (application/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:now:fnttom:0200000114-4

Access Statistics for this article

More articles in Foundations and Trends(R) in Technology, Information and Operations Management from now publishers
Bibliographic data for series maintained by Lucy Wiseman ().