IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v320y2025i3p670-681.html
   My bibliography  Save this article

Overseas production or domestic production? Impacts of tax disparity and market difference

Author

Listed:
  • Niu, Baozhuang
  • Zhang, Nan
  • Mu, Zihao

Abstract

Overseas and domestic production are two commonly employed strategies for multinational firms (MNFs) to manage their global production operations. Recent tax-cutting initiatives have made domestic production an attractive option for MNFs. We aim to investigate whether such initiatives can effectively induce MNFs to produce domestically, especially when they cater to both domestic and foreign markets. In this study, we develop a game-theoretical model that considers an MNF with two subsidiaries - a production subsidiary and a retail subsidiary - located in different markets, and a third-party seller that resells the MNF's product in the domestic market. We take into account two important differences between the two markets, namely the tax disparity and the market potential difference. Our analysis reveals that a higher foreign market potential can strengthen the MNF's tax-saving incentive under the domestic production strategy. We find that a relatively lower domestic tax rate may not induce the MNF's domestic production even if the foreign market potential is low. On the other hand, when the domestic channel competition is intense, a higher domestic tax rate may still incentivize the MNF to produce domestically. These results depend on the tradeoffs among the tax-saving benefit, the third-party seller's free-riding, and the channel competition. We caution that promoting domestic production through a low tax rate may harm domestic consumer surplus, highlighting the need for policymakers to carefully consider the impact of tax policies on consumers.

Suggested Citation

  • Niu, Baozhuang & Zhang, Nan & Mu, Zihao, 2025. "Overseas production or domestic production? Impacts of tax disparity and market difference," European Journal of Operational Research, Elsevier, vol. 320(3), pages 670-681.
  • Handle: RePEc:eee:ejores:v:320:y:2025:i:3:p:670-681
    DOI: 10.1016/j.ejor.2024.09.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037722172400715X
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ejor.2024.09.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Masha Shunko & Hung T. Do & Andy A. Tsay, 2017. "Supply Chain Strategies and International Tax Arbitrage," Production and Operations Management, Production and Operations Management Society, vol. 26(2), pages 231-251, February.
    2. Jiayan Xu & Vernon N. Hsu & Baozhuang Niu, 2018. "The Impacts of Markets and Tax on a Multinational Firm's Procurement Strategy in China," Production and Operations Management, Production and Operations Management Society, vol. 27(2), pages 251-264, February.
    3. Lin Tian & Asoo J. Vakharia & Yinliang (Ricky) Tan & Yifan Xu, 2018. "Marketplace, Reseller, or Hybrid: Strategic Analysis of an Emerging E‐Commerce Model," Production and Operations Management, Production and Operations Management Society, vol. 27(8), pages 1595-1610, August.
    4. Xie, Lei & Liu, Yunping & Han, Hongshuai & (Martin) Qiu, Chun, 2023. "Outsourcing or reshoring? A manufacturer's sourcing strategy in the presence of government subsidy," European Journal of Operational Research, Elsevier, vol. 308(1), pages 131-149.
    5. Guoming Lai & Yixuan Liu & Wenqiang Xiao, 2021. "International Taxation and Production Outsourcing," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 402-418, February.
    6. Hong, Xianpei & Zhou, Menghuan & Gong, Yeming, 2021. "Dilemma of quality information disclosure in technology licensing," European Journal of Operational Research, Elsevier, vol. 294(2), pages 543-557.
    7. Xianpei Hong & Menghuan Zhou & Yeming Gong, 2021. "Dilemma of quality information disclosure in technology licensing," Post-Print hal-04325612, HAL.
    8. Jin, Minyue & Zhang, Xueqing & Xiong, Yu & Zhou, Yu, 2021. "Implications of green optimism upon sustainable supply chain management," European Journal of Operational Research, Elsevier, vol. 295(1), pages 131-139.
    9. Song Huang & Xu Guan & Ying†Ju Chen, 2018. "Retailer Information Sharing with Supplier Encroachment," Production and Operations Management, Production and Operations Management Society, vol. 27(6), pages 1133-1147, June.
    10. Kanglin Chen & Xin Wang & Baozhuang Niu & Ying‐Ju Chen, 2022. "The impact of tariffs and price premiums of locally manufactured products on global manufacturers' sourcing strategies," Production and Operations Management, Production and Operations Management Society, vol. 31(9), pages 3474-3490, September.
    11. Woonghee Tim Huh & Kun Soo Park, 2013. "Impact of transfer pricing methods for tax purposes on supply chain performance under demand uncertainty," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(4), pages 269-293, June.
    12. Niu, Baozhuang & Chen, Yuyang & Zeng, Fanzhuo, 2023. "One step further for procurement cooperation: Will the industry leader benefit from its competitive manufacturer's joint determination of consumption quality?," European Journal of Operational Research, Elsevier, vol. 311(3), pages 989-1008.
    13. Hong, Xianpei & Govindan, Kannan & Xu, Lei & Du, Peng, 2017. "Quantity and collection decisions in a closed-loop supply chain with technology licensing," European Journal of Operational Research, Elsevier, vol. 256(3), pages 820-829.
    14. Huaqing Wang & Haresh Gurnani & Murat Erkoc, 2016. "Entry Deterrence of Capacitated Competition Using Price and Non-Price Strategies," Production and Operations Management, Production and Operations Management Society, vol. 25(4), pages 719-735, April.
    15. Vernon N. Hsu & Wenqiang Xiao & Jiayan Xu, 2019. "The Impact of Tax and Transfer Pricing on a Multinational Firm's Strategic Decision of Selling to a Rival," Production and Operations Management, Production and Operations Management Society, vol. 28(9), pages 2279-2290, September.
    16. Vidal, Carlos J. & Goetschalckx, Marc, 2001. "A global supply chain model with transfer pricing and transportation cost allocation," European Journal of Operational Research, Elsevier, vol. 129(1), pages 134-158, February.
    17. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    18. Minakshi Trivedi, 1998. "Distribution Channels: An Extension of Exclusive Retailership," Management Science, INFORMS, vol. 44(7), pages 896-909, July.
    19. Wei-yu Kevin Chiang & Dilip Chhajed & James D. Hess, 2003. "Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design," Management Science, INFORMS, vol. 49(1), pages 1-20, January.
    20. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    21. Kim, Bosung & Park, Kun Soo & Jung, Se-Youn & Park, Sang Hun, 2018. "Offshoring and outsourcing in a global supply chain: Impact of the arm’s length regulation on transfer pricing," European Journal of Operational Research, Elsevier, vol. 266(1), pages 88-98.
    22. Masha Shunko & Laurens Debo & Srinagesh Gavirneni, 2014. "Transfer Pricing and Sourcing Strategies for Multinational Firms," Production and Operations Management, Production and Operations Management Society, vol. 23(12), pages 2043-2057, December.
    23. Deng, Sijing & Xu, Jiayan, 2023. "Manufacturing and procurement outsourcing strategies of competing original equipment manufacturers," European Journal of Operational Research, Elsevier, vol. 308(2), pages 884-896.
    24. Sun, Libo & Jiao, Xiaoting & Guo, Xiaolong & Yu, Yugang, 2022. "Pricing policies in dual distribution channels: The reference effect of official prices," European Journal of Operational Research, Elsevier, vol. 296(1), pages 146-157.
    25. Guo, Shu & Choi, Tsan-Ming & Shen, Bin, 2020. "Green product development under competition: A study of the fashion apparel industry," European Journal of Operational Research, Elsevier, vol. 280(2), pages 523-538.
    26. Zhang, Jianxiong & Li, Sa & Zhang, Shichen & Dai, Rui, 2019. "Manufacturer encroachment with quality decision under asymmetric demand information," European Journal of Operational Research, Elsevier, vol. 273(1), pages 217-236.
    27. Jung, Se-Youn & Huh, Woonghee Tim & Park, Kun Soo, 2022. "Impact of the arm’s length regulation on a supply chain with asymmetric retailers," European Journal of Operational Research, Elsevier, vol. 300(3), pages 865-883.
    28. Fang Liu & Jing‐Sheng Song, 2017. "Coordinating a Semi‐Centralized Global Production Network Through Different Levels of Headquarters Involvement," Production and Operations Management, Production and Operations Management Society, vol. 26(2), pages 305-319, February.
    29. Xiaole Wu & Fuqiang Zhang, 2014. "Home or Overseas? An Analysis of Sourcing Strategies Under Competition," Management Science, INFORMS, vol. 60(5), pages 1223-1240, May.
    30. Cao, Kaiying & Xu, Yuqiu & Hua, Ye & Choi, Tsan-Ming, 2023. "Supplier or co-optor: Optimal channel and logistics selection problems on retail platforms," European Journal of Operational Research, Elsevier, vol. 311(3), pages 971-988.
    31. Shi, Xiutian & Tang, Jianxi & Dong, Ciwei, 2022. "Should a domestic firm carve out a niche in overseas markets? Value of purchasing agents," European Journal of Operational Research, Elsevier, vol. 300(1), pages 85-94.
    32. Guo Li & Lin Tian & Hong Zheng, 2021. "Information Sharing in an Online Marketplace with Co‐opetitive Sellers," Production and Operations Management, Production and Operations Management Society, vol. 30(10), pages 3713-3734, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Niu, Baozhuang & Xu, Haotao & Mu, Zihao, 2024. "To divide or not to divide: Impact of carbon market connections on firms’ resilient profitability and emission reduction," International Journal of Production Economics, Elsevier, vol. 270(C).
    2. Chen, Lei & Huang, Qiuyu & Xu, Jingwen, 2024. "On the “prisoner’s dilemma” of order timing in a cross-border and co-opetitive supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 185(C).
    3. Niu, Baozhuang & Li, Qiyang & Liu, Yaoqi, 2020. "Conflict management in a multinational firm's production shifting decisions," International Journal of Production Economics, Elsevier, vol. 230(C).
    4. Niu, Baozhuang & Chen, Lingyun & Wang, Jingmai, 2022. "Ad valorem tariff vs. specific tariff: Quality-differentiated e-tailers’ profitability and social welfare in cross-border e-commerce," Omega, Elsevier, vol. 108(C).
    5. Niu, Baozhuang & Zhang, Nan & Xu, Haotao & Chen, Lei & Ji, Ping, 2022. "Inviting MNFs’ green offshoring: Is it an effective way to coordinate economic and environmental sustainability?," International Journal of Production Economics, Elsevier, vol. 254(C).
    6. Kopel, Michael & Löffler, Clemens, 2023. "Tax differences and international location strategies," International Journal of Production Economics, Elsevier, vol. 256(C).
    7. Niu, Baozhuang & Ruan, Yiyuan & Xu, Haotao, 2024. "Less is more? Channel separation to mitigate triple competition and combat copycats in agency e-commerce," European Journal of Operational Research, Elsevier, vol. 315(1), pages 242-270.
    8. Deng, Sijing & Xu, Jiayan & Han, Yonghui, 2023. "A proprietary component manufacturer’s global supply chain design: The impacts of tax and organizational structure," Omega, Elsevier, vol. 115(C).
    9. Niu, Baozhuang & Mu, Zihao & Cao, Bin & Gao, Jie, 2021. "Should multinational firms implement blockchain to provide quality verification?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    10. Niu, Baozhuang & Xu, Jingwen & Lee, Carman K.M. & Chen, Lei, 2019. "Order timing and tax planning when selling to a rival in a low-tax emerging market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 123(C), pages 165-179.
    11. Huang, Hongfu & He, Yong & Li, Dong & Li, Shanshan, 2023. "Competing multinationals’ backshoring decisions: Tax arbitrage versus production reliability tradeoff," European Journal of Operational Research, Elsevier, vol. 311(2), pages 515-532.
    12. Niu, Baozhuang & Chen, Yuyang & Zeng, Fanzhuo, 2023. "One step further for procurement cooperation: Will the industry leader benefit from its competitive manufacturer's joint determination of consumption quality?," European Journal of Operational Research, Elsevier, vol. 311(3), pages 989-1008.
    13. Niu, Baozhuang & Yu, Xinhu & Dong, Jian, 2023. "Could AI livestream perform better than KOL in cross-border operations?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 174(C).
    14. Jianghua Wu & Yuan Xue & Jiahao Yu, 2024. "A strategic analysis of timing of wholesale pricing and information sharing strategy in dual-channel retailing," Annals of Operations Research, Springer, vol. 338(2), pages 1219-1240, July.
    15. Shi, Xiutian & Tang, Jianxi & Dong, Ciwei, 2022. "Should a domestic firm carve out a niche in overseas markets? Value of purchasing agents," European Journal of Operational Research, Elsevier, vol. 300(1), pages 85-94.
    16. Albert Y. Ha & Huajiang Luo & Weixin Shang, 2022. "Supplier Encroachment, Information Sharing, and Channel Structure in Online Retail Platforms," Production and Operations Management, Production and Operations Management Society, vol. 31(3), pages 1235-1251, March.
    17. Matsui, Kenji, 2024. "Should competing suppliers with dual-channel supply chains adopt agency selling in an e-commerce platform?," European Journal of Operational Research, Elsevier, vol. 312(2), pages 587-604.
    18. Jung, Se-Youn & Huh, Woonghee Tim & Park, Kun Soo, 2022. "Impact of the arm’s length regulation on a supply chain with asymmetric retailers," European Journal of Operational Research, Elsevier, vol. 300(3), pages 865-883.
    19. Yang, Huixiao & Ou, Jinwen & Chen, Xiaofeng, 2021. "Impact of tariffs and production cost on a multinational firm's incentive for backshoring under competition," Omega, Elsevier, vol. 105(C).
    20. Zhang, Ting & Wang, Yulan & Shen, Bin & Prak, Dennis, 2023. "Welfare-maximizing tariff versus trade-surplus-maximizing tariff: Impacts on multinational firm competition," International Journal of Production Economics, Elsevier, vol. 264(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:320:y:2025:i:3:p:670-681. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.