Return to the United States : impact of reshoring announcements and reshoring risks on market valuation

Abstract

With soaring labor and logistics costs in developing countries, supply chain disruptions during the COVID-19 pandemic triggered Western firms to “reshore” some of their offshore operations (performed in-house or outsourced) for certain strategically important products or production processes from foreign countries to their home countries. Although reshoring can create more domestic jobs and reduce supply chain risks, the impact of various external and internal risks associated with reshoring on market reaction remains unclear. This observation motivates us first to conduct a text mining analysis, revealing four important types of reshoring risks inherent to (1) foreign currency fluctuation, (2) intellectual property (IP) protection, (3) reshoring types (in-house, insourced, or outsourcing-to-outsourcing (OTO)), and (4) reshoring location choice (Republican- versus Democrat-led states). We then examine how these risk factors help explain the variations in reshoring’s market valuation based on 281 reshoring initiatives of 132 publicly traded firms in the United States announced between 2009 and 2022. Our empirical analysis reveals that the market reacts more positively to a firm’s reshoring announcement when the firm reshores under a high-currency-fluctuation environment or from countries with weak IP protection. However, the market’s reaction is more negative when the firm’s reshoring announcement entails insourced reshoring operations or when the reshored location is a Democrat- rather than Republican-led state. We do not find a significant market reaction to OTO reshoring.