Research On The Influence Of Competition And Origin Preferences On A Multinational Firm’s Choice For Production Location

This article considers the effect of competition and origin preferences on a multinational firm’s choice for production location.A multinational firm(M),whose headquarters locates in a developed country,can shift her production lines to a low-cost foreign country,but imported products are imposed tariffs.When selling to home customers,M faces the competition from a national firm(N).To model the two competing firms’ strategic interactions,we employ three common game modes,that is,M-led or N-led Stackelberg game,and simultaneous game.Due to origin preferences,local consumers underestimate the value of products made in foreign countries.This article first analyzes the situation under the monopoly operation of a multinational firm.And our result shows that,when consumers’ acceptance degree of foreign-made products is too low,M will not choose offshoring,even if the government does not impose tariffs.Secondly,this article studies the situation of a multinational firm facing the competition of a national firm,and our result shows that,under offshoring,the multinational firm with stronger market power are more likely to boost consumer surplus,and M(N)as a leader is more conducive to improving the total social welfare when the low-cost advantage of offshore production is significant(trivial).The higher the consumer’s acceptance of foreign-produced products,the stronger M’s motivation to adopt offshoring.Moreover,offshore production is better-off for both firms when the low-cost advantage of offshoring is moderate.Finally,this paper also conducts an extended analysis of the model of a multinational firm’ monopoly operation and facing competition.Our result shows that: when N is the leader or two firms own equal power,the total social welfare under competition is lower than that under monopoly if both consumers’ acceptance degree of foreign-made products and the domestic production costs are high.Finally,compared with the monopoly case,M’s incentive for offshore production is stronger under competition,and the weaker M’s market power is,the stronger M’s incentive for offshoring is.