Competing multinationals’ backshoring decisions: Tax arbitrage versus production reliability tradeoff

In the post-pandemic era, global supply chains are increasingly experiencing disruptions. To mitigate the effects of production disruptions, many multinational firms (MNFs) are centralising their supply chains by removing production subsidiaries back to the domestic countries (i.e. backshoring), at the expense of tax arbitrage benefits. This study conducts an analytical game-theoretical model to examine competing MNFs’ incentives to backshore, considering the trade-off between tax arbitrage and production reliability improvement. The MNFs’ equilibrium backshoring decisions, corresponding production quantities, and transferring prices are derived. We find that lower geographic tax differences and higher foreign country (or lower domestic country) disruption rates will jointly incentivise the MNFs to backshore; however, this does not guarantee higher expected profits for the two competing MNFs. The setting of symmetric MNFs could also result in the asymmetric equilibrium of backshoring strategy when the disruption risks in the same country are more correlated, which is induced by the competition mitigation incentives. Additionally, we find that backshoring always benefits customer surplus but may be detrimental to social welfare. Moreover, we endogenize the tax rate and investigate the government's tax regulation design problem. A main finding is that inducing MNFs’ backshoring by setting low tax rates would be unwise for the government under some conditions. To check the robustness of the main model, several extensions are also discussed.