Reshoring – Understanding and Defining the Concept

Get Complete Project Material File(s) Now! »

Frame of Reference

The purpose of this chapter is to provide the reader with a deeper knowledge on manufacturing reshoring and its motivations. The frame of reference is constructed by studying and analyzing the major theoretical perspectives, the identified motivations, and the solely existing interpretative framework. Firm-related contingent factors are derived from systematically reviewed empirical studies and presented in the final section.

!Reshoring – Understanding and Defining the Concept

Reshoring, while being an emerging area, lacks a clear definition and unified terminology among scholars (Gray at al., 2013; Fratocchi et al., 2015). Such a status can become a major barrier in fulfilling the purpose of this research and result in poorly defined theoretical concepts and low quality of the academic study (Wacher, 2008). Thus, it is crucial to understand and define the concept and apply common terminology for the following paper.
Initially the phenomenon was conceptualized by Holz in 2009, who proposed the term “back-shoring” describing “the geographic relocation of a functional, value creating operation from a location abroad back to the domestic country of the company” (p. 156). Ellram (2013) provided a similar definition of “bringing manufacturing at home … from a current location that is, de facto, not home”, while referring to it as “reshoring” (2013, p. 27). Foerstl et al. (2016) brought a new element to the existing definitions by extending the scope of the location decision from “back home” to “geographically closer locations” (p. 495). This led to additional terminologies, which are describing two options for location decisions, namely relocation to the home country, defined as either “back-reshoring” (Fratocchi et al., 2014) or “backshoring” (Foerstl et al., 2016) and relocation closer to the home country, referred in the literature as “nearshoring” (Foerstl et al., 2016) or “near-reshoring” (Fratocchi et al., 2014). It can be concluded that reshoring is a location decision which follows a previous decision to offshore (Fratocchi et al., 2015).
While offshoring is itself an imprecise term (Gray et al., 2013), existing alternatives for a company to either produce in a wholly owned facility (i.e., in-house) or contract production from a foreign supplier (i.e., outsource) added significant value to the further understanding of reshoring. Thus, Gray et al. (2013) added another distinguishing factor to reshoring, namely governance modes, which resulted in the creation of four reshoring options (Figure 1). The insourcing alternative has gained a lot of attention in empirical studies (e.g., Bals et al., 2016; Hartman et al., 2017a) and a variety of terms, such as “direct back-shoring” (Renz, 2005), “internal back-shoring” (Kinkel & Maloca, 2009), and “captive back-shoring” (Kinkel & Zanker, 2013) have been proposed to refer to it (Fratocchi et al., 2015). Nevertheless, comparative analysis of propositions on the reshoring phenomenon showed an agreement among the scholars that the change of a previously offshored location occurs regardless of the adopted governance modes, meaning that it includes insourcing as well as outsourcing (Fratocchi et al., 2015).
Several other propositions have been made regarding the questions whether the withdrawal from the offshored location has to be necessarily total or partial (Holz, 2009) and whether the reshoring decision should be treated as a part of a firm’s strategy or more of a correction activity of a previously miscalculated decision (Kinkel & Maloca, 2009).
With the purpose of creating a unified definition, Fratocchi et al. (2014) named the phenomenon “back-reshoring” and conceptualized it as “a voluntary corporate strategy regarding the home-country’s partial or total relocation of (in-sourced or out-sourced) production to serve the local, regional or global demands” (p.56). In this study, we will be applying the definition by Fratocchi et al. (2014) but referring to the phenomenon as manufacturing “reshoring”, which has been employed most frequently by the scholars (Fratocchi et al., 2016). In order to more deeply understand the origins of reshoring, the following section will be focused on major theoretical perspectives.

Major Theoretical Perspectives on Reshoring Motivations

Referring to the definition of reshoring, which is a location decision, many scholars tried to apply international business and managerial theories to explain the phenomenon, which were previously used to explain offshoring (Di Mauro et al., 2017). Thus, Transaction Cost Economics (TCE) (e.g., Kinkel & Maloca, 2009; Foerstl et al., 2016), Resource Based View (RBV) (e.g., Martínez-Mora & Merino, 2014; Fratocchi et al., 2016), Internalization Theory (e.g. Ellram et al., 2013), and “Eclectic Paradigm” (e.g., Ellram et al., 2013; Martínez-Mora & Merino, 2014) are among the most frequently applied.
TCE suggests that individual firms will tend to move away from higher cost to lower cost regions, all else being equal (Ellram et al., 2013). However, it also points to the high coordination and incentive costs that firms may face in the offshore location with respect to the home country (Fratocchi et al., 2016). According to the theory, long physical as well as “mental” distances are costly to manage, increase pressure and risks in the supply chain and make coordination activities complex, which increases quality issues (Joubioux & Vanpoucke, 2016). Further, opportunistic behavior of the foreign production site or supplier might make it very costly to negotiate, monitor and enforce all necessary trans-border supply and coordination activities (Kinkel & Maloca, 2009). Consequently, the above-mentioned transaction and coordination costs might be a strong argument for re-concentrating production capacities via insourcing or backshoring activities (Kinkel & Maloca, 2009).
RBV, in turn, deals with the search for competitive advantage (Wiesmann et al., 2017) and highlights the importance of firm-specific factors in the decision-making (Fratocchi et al., 2016). It helps to explain reshoring from two perspectives, namely a correction of a previously miscalculated decision to offshore or a strategic change. On one side, firms could reshore due to their inability (i.e., failure) to develop distinctive resources abroad, or inability to properly exploit the host country’s resources in order to establish competitive advantage (Di Mauro et al.,2017). Consequently, reshoring becomes a sensible reverse strategy when offshoring hinders the firm’s ability to develop and maintain distinctive capabilities (e.g., intellectual property protection, quality, innovation, etc.), access external knowledge or other critical resources, understand customers’ needs and fulfill them appropriately (Fratocchi et al., 2016). On the contrary, reshoring can be viewed as a positive strategic decision, whereas it can foster the firm’s ability to create value and maintain competitive advantage through quality and innovation, or to provide distinctive services to its customers (Fratocchi et al., 2016). This has been empirically proven based on the reshoring case of Burberry, which operates in the luxury clothing industry, where the country of origin (i.e., “made-in-effect”) is among critical factors (Robinson & Hsieh, 2016).
The above-mentioned theories are essentially included in Internalization Theory, which explains the efficiency behind the decision to reshore (Rugman, 2010). Internalization Theory describes the drivers of a firm’s foreign expansion and its choices of modes of entry, which are typically quoted as “make-or-buy decision” (Buckley & Casson, 2009). It assumes that the most efficient way to go across borders is to internalize (i.e., take direct control over) firm-specific, scarce, knowledge-based resources and capabilities (Buckley & Casson, 2009; Fratocchi et al., 2016). As the fundamental characteristics of global economy are changing (Casson, 2013), the value of local specialization is declining, and the costs of managing production in the offshored location are increasing (Martínez-Mora & Merino, 2014), the initial advantage of cost efficiency disappears. Thus, these macro-level factors affecting location characteristics and governance efficiency can be used to explain reshoring.
While Internalization Theory treats firm-specific advantages as a unified dimension, Dunning (1980) proposed to make a clear distinction between three determinants of international production, namely ownership advantages, location advantages, and internalization advantages (OLI). His “Eclectic Paradigm” explains that a firm could be motivated to reshore due to deterioration of one or several OLI advantages, on which the initial offshoring decision was based (Dachs & Kinkel, 2013). In this vein, Fratocchi et al. (2015) presented evidence that motivations to reshore could be explained via a reverse application of the OLI paradigm. Ellram et al. (2013) also support this view and see the origins of reshoring in changes in location-specific factors (i.e., changes in the characteristics of the host and home locations).
After a recent suggestion by Bals et al. (2016) to apply new theoretical perspectives to existing theories and focus on contingency factors at different levels of units and analysis, new streams of research started to emerge. Organizational Buyer Behavior (OBB) was used by Foerstl et al. (2016) as a complementary theory to TCE to explain reshoring motivations from the perspective of how novel, frequent, important, and complex the task (i.e., outsourcing or offshore production) is. In addition to increased transaction difficulties, there are human and behavioral factors, such as bounded rationality of a decision-maker, which can influence the decision to reshore (Williamson, 1998).
Among other recently applied theories there are Industrial Marketing and Purchasing (Baraldi et al., 2017), Social Network Theory (Ashby, 2016), and Contingency Theory (Benstead et al., 2017). All three theories emphasize that reshoring does not take place in isolation. Hence, reshoring motivations are influenced by the existing networks, interactions between the actors, and other context specific factors (Baraldi et al., 2017; Benstead et al., 2017; Ashby, 2016). This can be observed in the example from the bicycle industry, where reshoring was a reaction to internal organizational change of improved productivity due to a new salary system (Gylling et al., 2015). These new developments in the field are in line with the focus of our study and support the purpose of “exploring and establishing links between motivations to reshore and firm-related contingent factors”. However, before outlining these factors, in order to distinguish between contingent and motivational factors, it is essential to analyze the variety of identified motivations of reshoring in the literature and proposed classifications.

READ  Cross-Sector Social Partnership Framework

Reshoring Motivations and Their Classifications

Extensive literature reviews for motivational factors have been conducted by different groups of scholars with two major purposes, which are either to provide a review on the state of the literature to outline further research directions (e.g., Foerstl et al., 2016; Stentoft et al., 2016; Wiesmann et al., 2017) or to develop a theoretical framework for further analysis (e.g., Fratocchi et al., 2016; Benstead et al., 2017). Each group of scholars adopted different methodologies, such as for systematic review only peer-reviewed journal papers were considered, while for the development of theoretical frameworks public secondary data (e.g., historical archives of relevant newspapers or papers by consulting firms) had been used. As result, a different number of motivations had been revealed and different perspectives on their classification had been proposed.
In their systematic literature review, Stentoft et al. (2016) identified 25 reshoring motivations and proposed to classify them into the following seven clusters: cost, quality, time and flexibility, access to skills and knowledge, risks, market, and other factors. Meanwhile, in the most recent systematic literature review by Wiesmann et al. (2017) 32 motivations were revealed and classified into five groups, which are global competitive dynamics, host country drivers, home country drivers, supply chain drivers, and firm-specific drivers.

1. Introduction 
1.1 Background
1.2 Problem
1.3 Purpose
2. Frame of Reference
2.1 Reshoring – Understanding and Defining the Concept
2.2 Major Theoretical Perspectives on Reshoring Motivations
2.3 Reshoring Motivations and Their Classifications
2.4 Motivations of Manufacturing Reshoring: An Interpretative Framework by Fratocchi et al. (2016)
2.5 Firm-related Contingent Factors
3. Methodology and Method 
3.1 Research Philosophy
3.2 Research Methodology
3.3 Research Method
3.4 Research Quality
3.5 Research Ethics
4. Analysis 
4.1 Within-case Analysis
4.2 Cross-case Analysis
5. Discussion
5.1 Contribution
6. Conclusions
6.1 Limitations
6.2 Future Research

Related Posts