Offshoring and outsourcing in a global supply chain: Impact of the arm’s length regulation on transfer pricing

Bosung Kim, Kun Soo Park, Se-Youn Jung and Sang Hun Park

European Journal of Operational Research, 2018, vol. 266, issue 1, 88-98

Abstract: We consider the structure of a global supply chain for operational decisions in a multinational firm (MNF) with tax considerations. The MNF consists of two divisions: one for production and the other for retailing. While the retail division of the MNF and the market for its product is located in a domestic country, the production division may be located in either the domestic (high-tax) country or a foreign (low-tax) country. When the two divisions of a MNF are co-located in the domestic country, the firm enjoys the benefit of a centralized operational decision on the order quantity to maximize its total profit although there is no tax saving opportunity. On the other hand, a MNF can enjoy a tax saving benefit when offshoring its production division to a low-tax country although its operational decision on the order quantity is decentralized, which is harmful to the supply chain profit due to double marginalization. The MNF may further pursue the low procurement cost of its retail division by allowing the retail division to search for an outsourcing opportunity from an outside supplier. However, outsourcing can hurt the profit of the MNF from the loss of the production division due to competition with outside suppliers. We analyze the trade-offs in the MNF’s optimal choice of supply chain structure. In addition, we incorporate a regulation on the MNF’s internal transaction by tax authorities, which is commonly called the arm’s length regulation. We study how the MNF’s choice of the operational structure of its supply chain changes in consideration of this regulation. Our results suggest that tax considerations deserve attention from managers when designing the supply chain structure.

Keywords: Supply chain management; Offshoring; Outsourcing; Transfer price; Arm’s length regulation (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221717307944
Full text for ScienceDirect subscribers only

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:eee:ejores:v:266:y:2018:i:1:p:88-98

DOI: 10.1016/j.ejor.2017.09.004

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().