Offshoring and reshoring of manufacturing activities: a two-country evolutionary model

Abstract

In this paper, we consider a two-country model to study the offshoring and reshoring of manufacturing activities. A multinational enterprise (MNE) can offshore its production, or part of it, in a technologically laggard country to take advantage of a lower labour-productivity remuneration and a lower minimum wage. The concentration of the manufacturing activity in a single country causes an increment of the bargaining power of workers that mirrors in a higher labour cost. These disadvantages of the agglomeration may favour an offshoring process, which, however, empirical evidence suggests to be slow. The investigation underlines that an industrial policy that aims to increase the within-country (technological) spillovers that, on their own, increase the labour productivity in the technological-leader country, is necessary to incentivize an MNE to reshore the manufacturing activity. The economic-policy implications are confined to a monopolistic configuration of the manufacturing activity and to a market that does not distinguish the geographical origin of the goods.