Do firms benefit from multinationality through production shifting?

Previous work shows that multinationality creates firm value due to the potential of multiple host countries to provide operational flexibility. This paper examines whether this value effect on the stock market is backed by a profitability effect of exercising operational flexibility through production shifting across countries. Our panel study of German MNCs confirms that production shifting due to local factor cost changes increases the profitability of international production networks. However, the results also suggest that production shifting from countries with rising labor costs to countries with falling labor costs is not prevalent in MNCs and is not related to the number of host countries. Implications for future research are given. (C) 2011 Elsevier Inc. All rights reserved.