Multinational manufacturer’s outsourcing strategy with asymmetry innovative quality information

Outsourcing to home country suppliers (HS) or local suppliers (LS) by multinational manufacturers (MNFs) to manage global production has garnered widespread attention, yet quality information asymmetry is often overlooked. This study examines a supply chain where the MNF, with private innovation quality, needs to balance cost savings with maintaining innovation quality advantages. Specifically, outsourcing to the LS avoids tariffs but risks innovation spillover, while outsourcing to the HS incurs tariffs and higher production costs but safeguards innovation quality. The main findings are as follows: First, when the LS does not encroach, the MNF prefers the LS. However, as cost savings outweigh potential innovation loss, with LS encroachment, the MNF may still choose the LS when the unit production cost is low, or the cross-innovation spillover sensitivity is weak. Interestingly, we find that outsourcing to the LS helps the MNF sustain a price premium when encroachment occurs. Second, by endogenising the supply chain structure, we identify two effects of LS encroachment: the push effect, where LS encroachment drives the MNF to switch to the HS; and the pull effect, where the LS wants to retain the MNF by non-encroachment. Therefore, decision-makers must account for the interaction between the two strategies.