The Role of Labor and Transaction Costs in the Success of Manufacturing Offshore: Evidence from Mexico's Maquiladora Industry

58 Pages Posted: 23 Nov 2014

See all articles by Leslie Eldenburg

Leslie Eldenburg

University of Arizona

Richard A. Price

University of Oklahoma

Francisco J. Román

George Mason University - Department of Accounting; George Mason University

Multiple version iconThere are 2 versions of this paper

Date Written: November 20, 2014

Abstract

The practice of shifting manufacturing activities to lower wage countries has thrived lately as firms attempt to reduce labor and other costs. However, success has been elusive for many of these firms. We investigate the determinants of offshoring success, with emphasis on the role of transaction costs in firms’ decisions to continue (or discontinue) manufacturing abroad. We hypothesize that labor constraints, supply chain frictions, and other transaction costs could impact production and potentially offset labor cost savings. We analyze labor costs and constraints and relevant transaction costs. We find that although successful plants pay a wage premium and more benefits to workers, their overall labor costs are relatively lower. These plants attract a more skilled and stable labor force, outsource non-manufacturing functions more often, and use fewer Mexican suppliers. Overall, our findings suggest that environmental frictions and transaction costs matter when shifting production offshore.

Keywords: Manufacturing offshore, variability in costs, labor constraints, labor costs, transaction costs

JEL Classification: F6, L6, M41

Suggested Citation

Eldenburg, Leslie G. and Price, Richard A. and Román, Francisco J., The Role of Labor and Transaction Costs in the Success of Manufacturing Offshore: Evidence from Mexico's Maquiladora Industry (November 20, 2014). Available at SSRN: https://ssrn.com/abstract=2529217 or http://dx.doi.org/10.2139/ssrn.2529217

Leslie G. Eldenburg

University of Arizona ( email )

McClelland Hall Room 301H
Tucson, AZ 85721
United States
520-621-4585 (Phone)
520-621-3742 (Fax)

Richard A. Price

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-5759 (Phone)

Francisco J. Román (Contact Author)

George Mason University - Department of Accounting

Fairfax, VA
United States

George Mason University ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-1849 (Phone)

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