Among multinational manufacturers, firms engaged in reshoring are typically smaller, laborintensive, less productive, and less experienced in overseas production. Moreover, despite receiving sizable government subsidies, the domestic investments by reshorers yield smaller employment impacts compared to similar-sized domesticonly counterparts. Therefore, incentivizing domestic investment for all firms, irrespective of their repatriation, would be more effective in meeting objectives such as stabilizing supply chains, maintaining domestic manufacturing competitiveness, and boosting employment. The solution to the challenges posed by the excessive globalization of production lies in localizing production activities rather than the firms themselves.


Ⅰ. Issue

Reshoring is rising to the forefront of policy discussions. What is reshoring, and what drives its escalating significance? Before the 2008 Global Financial Crisis, the global economy was undergoing a rapid integration, aptly described as hyper-globalization, driven by the expansion of the global supply chain. As enterprises from developed countries moved their manufacturing to emerging markets like China, Mexico, and Eastern Europe to capitalize on their low-cost labor and abundant resources, the international division of labor accelerated and led to the deep formation of inter-country production networks. In this process, offshoring―the practice of outsourcing production activities, once conducted domestically, to foreign subsidiaries established through direct investment (or to specialized local firms)―increased precipitately.

Entering the 2010s, public perception was growing that offshoring was taking away domestic jobs, and political discourse began to emphasize the adverse effects of offshoring. In response, some companies, realizing the inefficiencies of offshoring, began relocating their overseas production facilities back home. The return to their home countries, known as reshoring, gained prominence as a policy issue due to the backlash against it and the rise of nationalism. In Korea, particularly, the push for fostering key domestic industries gained traction following Japan's export restrictions on semiconductor materials in 2019. This trend was further reinforced by events such as the US-China trade conflict, supply disruptions due to COVID-19, the Chinese urea crisis, and the Russia-Ukraine war.

The Korean government has long been developing and enforcing laws and policies designed to facilitate reshoring. Despite the continuous expansion of coverage and benefits since its launch in 2013, the “Support Program for Returning Domestic Businesses (U-turn Companies)” has yet to achieve notable success, prompting some to advocate for bolder incentives. However, before discussing ramping up the reshoring policy, it is essential to first assess whether these policies effectively achieve objectives like supply chain stabilization and job creation. Accordingly, this study identifies the key characteristics of reshoring firms and analyzes internal and external factors influencing their reshoring decisions. Based on these findings, it discusses the effectiveness and challenges of the current reshoring support system and proposes more viable alternatives.

Ⅱ. Reshoring Policies: Korea and Other Countries

Before analyzing the reshoring policies of Korea and other countries, it is crucial to acknowledge that while major countries commonly emphasize reshoring, their policy implementation in practice significantly differs from Korea’s approach. Table 1 details Korea’s reshoring policy, defining U-turn companies as those that have substantially reduced their overseas production while concurrently increasing domestic investment in the same activities. Recently, Korea has initiated waiving the overseas production reduction requirement for highly advanced and supply chain-critical items. Nevertheless, the core principle of embodying the lexical definition of reshoring―diminishing foreign investment and augmenting domestic investment within the same industry―remains intact.

In contrast to Korea, the US encourages the return of its companies as part of an industrial policy, focusing on high-tech sectors like semiconductors, renewable energy, and healthcare. The US approach does not impose conditions like reducing foreign investments and offers similar incentives to foreign companies investing in the US. Major European countries, such as Germany and France, indirectly promote reshoring through policies aimed at the digital transformation of manufacturing. Japan and Taiwan, targeting a reduction in their excessive reliance on China, have policies to repatriate firms from China, but these are limited to specific industries and mainly offer domestic investment incentives (see Appendix Table 1). In the end, the reshoring policies of these countries are more centered on nurturing specific domestic industries rather than on the business relocation itself, supporting investments regardless of the company’s nationality to strengthen the overall industrial production capacity.

Ⅲ. Classifying Reshoring by Investment Type

Direct evaluation of the Support Program for U-turn Companies requires assessing the performance of selected reshoring firms after their U-turn. However, the small number of these firms, coupled with the fact that the majority are still in the preparatory phase of operations, poses a challenge for a meaningful analysis. To address this, the study employs an indirect assessment approach by classifying and analyzing multinational manufacturing firms in Korea that have engaged in reshoring investments. Multinational manufacturers in possession of production facilities both in Korea and overseas have the option to invest in either or both locations. Their choice of investment location naturally categorizes their activities into reshoring and its precursor, offshoring.

Offshoring refers to investing exclusively abroad, either by withdrawing or withholding domestic investments. Conversely, reshoring is defined as withdrawing or withholding foreign investments while investing solely domestically. Besides these two investment types, there are also cases where firms invest in both domestic and foreign locations (expanders) and cases where investments are withheld or reduced in both locations (idlers). As summarized in Table 2, the investment types of multinational firms can be classified into four categories.

In this classification, reshoring includes the firms selected as U-turn Companies and aligns closely with the reshoring concept as practiced in countries like the US. In other words, reshoring in this study hinges on whether multinational firms are shifting their investments from previous foreign expansions to domestic ventures. This perspective is consistent with the selection of U-turn Companies in advanced and supply chain-critical industries, irrespective of reducing foreign investments.

For statistical analysis, the study divides the period between 2011 and 2019, a time when discussions on reshoring began in earnest, into three phases: Phase 1 (2011-13), Phase 2 (2014-16), and Phase 3 (2017-19). Investment types are classified based on the average domestic and foreign investment amounts of multinational manufacturing firms during these phases, as defined in Table 2. The three-year intervals were chosen to account for the lumpiness of investments made, often large and sporadic. The sample for the analysis is limited to 1,200 multinational manufacturing firms that had foreign subsidiaries or affiliates during Phase 0 (2008-10) and continued to exist through Phase 3. These firms, being among the largest manufacturers in Korea, have a relatively significant impact on the economy.

Ⅳ. Investment Type Trends and Characteristics of Corresponding Firms

Table 3 presents the distribution of 1,200 firms categorized by investment type over the analysis period. Although there are minor differences throughout these phases, the distribution of firms across the four investment types is relatively balanced. While the Korean government’s annual average of selected U-turn Companies over the recent nine-year period (2014-22) is only 14, the reshorers shown in the table average about 97 annually, accounting for a substantial 24% of the entire sample. This disparity underscores the significant impact that the definition of reshoring can have on statistical data. Therefore, the focus should shift from merely quantifying the number of reshoring firms to understanding how these firms are contributing to the economy.

Interestingly, multinational firms tend to maintain the same investment type in the subsequent phase (3 years), as demonstrated by the transition matrix in Table 4. In the table, the rows represent the investment types in Phase t (t = 1, 2), and the columns indicate types in Phase t+1. That is, for instance, 40.4% of expanders in one phase continued with the same investment type in the next. Similarly, firms of other investment types also predominantly remained in their initial types. However, a significant finding is that reshorers have a 70% probability of either continuing with reshoring (39.7%) or choosing to hold or reduce investments (29.6%) in the following phase. Since investments are made for a firm’s future growth, and production activities abroad demonstrate a firm’s international competitiveness, the competitiveness of reshoring firms may weaken in the mid-to-long term.

For a clearer understanding of the differences between reshorers and those with other investment types, this section turns to Figure 1. Panel (a) compares the size (the number of regular employees) of the domestic parent firms across different types. Reshorers are approximately 34% smaller than expanders and 21% smaller than offshorers.8) However, Panel (b) shows that as for labor intensity (the number of workers relative to tangible assets), reshorers rank the highest, indicating that reshorers are generally more labor-intensive than those of other investment types. These characteristics suggest that reshorers might have lower productivity. Indeed, as depicted in Panel (c), the labor productivity of reshorers (the value added per employee) is about 14% lower than that of expanders and roughly 5% lower than that of offshorers.

Meanwhile, Panel (d) of Figure 1 shows the average number of foreign subsidiaries held by firms in the previous Phase (t-1). Contrary to the prior that reshorers might have more overseas subsidiaries due to withdrawing or downsizing operations, the reality is quite the opposite. Reshorers were not very active in overseas production activities from the outset. Moreover, when calculating the average distance between the home country and the host countries where subsidiaries are located, reshorers exhibit the shortest distance. According to Antras et al. (2017), the greater the distance to foreign subsidiaries, the higher the fixed sunk costs associated with production activities. Therefore, the finding implies that the initial fixed costs for foreign expansion were also comparatively lower for reshorers.

These results are not driven by sector-specific factors. Reshoring is observed evenly across a range of industries, and it is primarily firms with these certain characteristics within the same industries that tend to reshore. As Figure 1 summarizes, reshoring is predominantly undertaken by multinational firms that are relatively small in size (Panel (a)), labor-intensive (Panel (b)), have lower productivity (Panel (c)), and lack extensive experience in overseas production (Panel (d)). Consequently, these firms have a lower probability of expansive foreign investments in the future (the third row of Table 4). This suggests that reshoring may not yield as significant a contribution to the Korean economy as policymakers had anticipated.

Figure 2 presents a direct analysis of the correlation between investment types and the production activities of domestic parent firms. Growth in reshorers is observed in key production activity indicators such as sales, export/import values, and employment. This growth is a natural outcome of the increased scale of production activities stemming from domestic investment, a pattern also found among expanders. Conversely, offshorers, due to their suspended or reduced domestic investments, have experienced limited increases in sales and export/import values, and have also seen a decline in employment.

The employment data in Panel (d) of Figure 2 could be interpreted as supporting the need for reshoring. However, as previously mentioned, employment growth is a natural consequence of investment. The rationale for policy support should hinge on whether the relative increase in employment due to reshoring investment is meaningfully significant. During the analysis period, the net employment per billion won of real net investment in reshoring was 1.17 persons. This figure is lower compared to expanders with 1.32 persons per billion won. Another group comparison, based purely on domestic firms (those without foreign subsidiaries) for the same period using the Survey of Business Activities, reports 2.48 persons employed per billion won of investment. This suggests that supporting investments in purely domestic firms could be more than twice as effective in promoting employment than targeting reshorers.

Ⅴ. Factors behind Offshoring and Reshoring Investments

In this section, the factors that influence corporate decisions on types of investments are identified using a quantitative model. Firms make strategic investment decisions based on their internal and external environments and future outlooks. This study selects six internal and six external factors based on their perceived importance. Internal factors include characteristics previously examined (firm size, labor intensity, total factor productivity, number of foreign subsidiaries, and distance to these subsidiaries), as well as an additional factor related to productivity, R&D intensity (R&D investment per employee). External factors encompass the economic characteristics of foreign countries (labor costs, market accessibility, and comparative advantage in upstream supply) and key policies related to investment (nominal corporate tax rates in Korea and foreign countries, and the rate of increase in Korea’s minimum wage). In particular, the study analyzes the impact of domestic nominal corporate tax rates and minimum wage policies on reshoring with the aim of providing insights for policy design.

Table 5 presents the estimated correlations between these factors and investment types, with the following interpretations. The values in the table show how a 1% increase in each factor is associated with the probability of selecting a particular type of investment over offshoring. A value above zero indicates an increase in likelihood, while a number below zero indicates a decrease. For example, if a company’s total factor productivity in the previous Phase (t-1) is 1% higher, the probability of choosing expansion-type investment over offshoring increases by about 41%, whereas the probability of choosing to suspend or reduce investment falls by about 34%. Additionally, the probability of opting for reshoring decreases by 11%, although this is not statistically significant.

 

An analysis of internal factors influencing the four investment choices of multinational manufacturers shows that firm characteristics depicted in Figure 1 (size, productivity, labor intensity, etc.) are indeed important.

The relationship between internal corporate factors listed in Table 5 and the selection of investment type largely aligns with the firm characteristics by investment type seen in Figure 1. This suggests that holding other conditions constant, these characteristics significantly influence the choice of investment type. Among the external factors, variables related to labor costs show the most statistically significant relationship with investment type. Notably, a 1% increase in foreign labor costs increases the probability of choosing reshoring over offshoring by 91%, whereas a 1%p increase in Korea’s minimum wage decreases the probability of choosing reshoring by 9% and expansiontype investment by 20%. These findings reaffirm that changes in labor costs, both domestically and abroad, are the most decisive factor in determining investment locations.

Labor costs, both domestic and overseas, are the most relevant external factor in investment-type decisions by multinational manufacturers, emphasizing that high domestic labor costs are a fundamental barrier to reshoring.

Ⅵ. Conclusion and Policy Recommendations

Based on the analysis thus far, this section evaluates the effectiveness of current support policies for U-turn Companies. Primarily, these policies are designed to encourage renowned large corporations to withdraw their overseas factories and expand domestic investment, thereby contributing to employment growth and revitalizing the domestic economy. However, the analysis reveals that it is predominantly smaller and less globally competitive firms that choose to reshore. Although this study does not directly analyze U-turn Companies supported by the Korean government, they are expected to share similar characteristics, as they fall within the same category examined. Therefore, the impact of these policies on such firms is likely to be less effective than anticipated. Particularly for employment, a key policy objective, the job creation effect of reshorers in relation to their investment was significantly lower compared to similar-sized domestic-only firms. This shortfall makes it difficult to justify supporting reshoring firms solely on the grounds of employment promotion.

Next, the argument for supporting U-turn Companies in securing a domestic production base amid global supply chain instability seems valid. However, it is necessary to examine whether the relevant policy is overly fixating on the rhetoric of reshoring and its formalities. Why should securing a domestic production base necessarily involve (i) Korean firms that have expanded overseas and (ii) reducing their overseas production and returning home? Commonsensically, without relying on detailed analyses, the most attracted to the U-turn support policy would be businesses struggling with their overseas operations to the point of considering disinvestment. Providing preferential benefits for domestic investment to these firms alone could lead to a distortion in the allocation of domestic resources and inadvertently result in reverse discrimination against established domestic businesses.

In conclusion, this study recommends achieving the objective of the existing U-turn support policy―including supply chain stabilization, maintaining competitiveness in manufacturing, and employment promotion―through strengthening incentives for domestic investment, independent of whether foreign production facilities are brought back home (reshoring). Especially, given the recent sharp rise in domestic labor costs driving businesses offshore, enhancing domestic investment incentives could be a viable countermeasure (Ahn et al., 2022). If the problem is the excessive globalization of production, the solution should focus on localizing production rather than localizing firms. The analysis shows that the most competitive firms with substantial contributions to the domestic economy are those that are actively investing both domestically and abroad, the expanders. Therefore, it is advisable to encourage firms to invest domestically, without unnecessarily restricting their activities in global markets.

It is advisable to achieve the objectives of the U-turn support policy, such as stabilizing supply chains, maintaining competitiveness in manufacturing, and employment promotion, through strengthening incentives for domestic investment, independent of whether foreign production facilities are brought back home (reshoring). If the problem is the excessive globalization of production, the solution should focus on localizing production rather than localizing firms.

   

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CONTENTS

• Ⅰ. Issue
  
  Ⅱ. Reshoring Policies: Korea and Other Countries
  
  Ⅲ. Classifying Reshoring by Investment Type
  
  Ⅳ. Investment Type Trends and Characteristics of Corresponding Firms
  
  Ⅴ. Factors behind Offshoring and Reshoring Investments
  
  Ⅵ. Conclusion and Policy Recommendations