Country-of-Origin and Brand Image in Global Outsourcing Adjustment

Abstract

A global firm may need to adjust its outsourced functions when it competes in the global market place. The outsourcing adjustment will product two effects, brands image effect and the country of origin effect. The paper considers a setting of two global firms, where each has a manufacturing facility in one of the two developing countries but sell their differentiated products in a developed country. The product differentiation is solely based on differences in brand image (BI), country of origin (COO) and their interaction. We demonstrate how firms make location choices in equilibrium as driven by these effects and their inner working relations. We then look at the optimal behaviors of the firms to consider moving, when they receive outside shocks to the demand structure. We show that a firm's moving decision is not only driven by the COO sensitivity to its own product by the COO sensitivity to its rival's product as well. Our location choice model based on COO and BI considerations also has strong policy implications for host countries, particularly developing countries which are often times the receiving end of FDI. From the firm's perspective, the important factors driving the decision to move are the country's COO value and consumers' sensitivity towards COO. In that regard, it is in the host government's interest to maintain and strive for a higher COO value. This is because an adverse incident coming from one exporter or an entity catering to the outsourcing market that tarnishes the COO image tends to have a contagious effect that spreads to other industries. JEL Classifications: F23, M31