The effect of operational flexibility on decisions to withdraw from foreign production locations

Research on international divestment has identified a variety of factors that influence the closure of individual subsidiaries. Drawing on the concept of operational flexibility, this paper investigates the flexibility characteristics of an international production network to predict divestments of elements of this network. The analysis of 596 production locations of 189 German manufacturing firms reveals that the decision to divest a foreign location due to rising and uncertain labor costs is moderated by the ease of dismissing workers and the opportunity to shift production to locations with opposite labor cost developments. Furthermore, the results suggest that the costs of increasing production output moderate the influence of labor cost developments in the remaining locations of the network on the decision to withdraw from a location.

► We investigate divestment decisions within international production networks.
► Ease of dismissing moderates the influence of rising labor costs on divestments.
► The opportunity to shift production moderates the influence of uncertain labor costs.
► Costs of increasing output moderate the influence of remaining locations’ labor costs.