Optimizing Production Relocation Timing Decisions

Abstract

In a globalized economy, companies face a range of challenges and opportunities related to relocating production activities to a new country. Relocation can yield significant cost savings and other benefits, but there are also risks including potential damage to the brand image. Thus, firms need to carefully evaluate when to relocate and when to stop production in a particular location. We formulate an optimal control model and derive analytical as well as numerical results to provide insights into the optimal relocation timing and production stoppage decisions. We show that factors like higher relocation costs, higher production costs in the relocation country but high brand image in the country of origin, can postpone production relocation. Competitive effects alter relocation timing, particularly when the firm faces direct competition and asymmetric negative cross-image spillover effects with the rival brand in the home or relocation country. The paper discusses illustrative examples and derives implications for the timing of relocation and the duration of production in the relocation country.