Journal of World Business 54 (2019) 101017

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Journal of World Business

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Bringing it all back home? Backshoring of manufacturing activities and the T

adoption of Industry 4.0 technologies
⁎
Bernhard Dachsa, , Steffen Kinkelb, Angela Jägerc
a
AIT Austrian Institute of Technology, Gifinggasse 4, 1210 Vienna, Austria
b
University of Applied Sciences Karlsruhe, Moltkestraße 30, 76133 Karlsruhe, Germany
c
Fraunhofer-Institute for Systems and Innovation Innovation Research ISI, Breslauer Strasse 48, 76139 Karlsruhe, Germany

A R T I C LE I N FO A B S T R A C T

Keywords: We investigate the relationship between backshoring of production activities and digital manufacturing tech-
Backshoring nologies, also known as Industry 4.0 (I4.0). We argue that I4.0 supports backshoring because it provides a higher
Offshoring productivity and flexibility which offers an incentive for firms to locate production close to their European
Industry 4.0 customers.
Technology
The empirical test is based on a large dataset of 1700 manufacturing firms from Austria, Germany, and
Switzerland. Backshoring is still a rare event with a share of around 4% of all firms. Descriptive statistics as well
as regression results indicate a positive correlation between the adoption of I4.0 technologies and companies’
backshoring propensity.

1. Introduction
Backshoring (or ‘reshoring’) has received broad attention in the
academic literature recently (De Backer, DeStefano, Menon, & Suh,
2018; Di Mauro, Fratocchi, Orzes, & Sartor, 2018; Fratocchi, Di Mauro,
Barbieri, Nassimbeni, & Zanoni, 2014; Kinkel & Maloca, 2009; Kinkel,
2012; Stentoft, Olhager, Heikkilä, & Thoms, 2016; Wiesmann, Snoei,
Hilletofth, & Eriksson, 2017), and even more in public debates. This
literature investigated, among other issues, the motives and drivers of
backshoring. Various studies identified a lack of quality and flexibility,
a narrowing gap in labour costs, and too high co-ordination and
transportation costs as the most relevant motives for backshoring.
There is, however, one important driver the current literature has
almost completely ignored until recently: New production technologies,
also known as Industry 4.0 (I4.0) or the Internet of Things (IoT), which
allow firms to compensate labour cost advantages of offshoring loca-
tions and allow to move production back to increase flexibility and
reduce lead time. Rather, the international business (IB) literature sees
information and communication technologies (ICTs) as tools that help
firms to expand their geographical scope and reduce co-ordination costs
in large, dispersed networks of subsidiaries, suppliers and customers
(Alcácer, Cantwell, & Piscitello, 2016; Chen & Kamal, 2016).
Only very recent contributions consider technology as a driver for
backshoring: As one voice of many, the OECD calls the digitalisation of
manufacturing the “most likely the biggest game-changer, reversing the
importance and length of GVCs and reorienting global production and
trade back towards OECD economies” (De Backer & Flaig, 2017, p. 6).
New digital technologies “make the international fragmentation of
production less attractive” (De Backer & Flaig, 2017, p. 40). Other
contributions include Laplume, Petersen, and Pearce (2016), who dis-
cuss the relevance of Additive Manufacturing for backshoring, Strange
and Zucchella (2018), who point to possible disruptions for GVCs from
I4.0, or De Backer et al. (2018) investigate the impact of robotics on
GVCs. They find that robotics appears to have a negative impact on the
offshoring activities of firms in developed economies but does not yet
trigger reshoring activities. Brennan et al. (2015) conclude that dis-
ruptive technologies like the Internet of Things or Additive Manu-
facturing can have a disruptive impact on the configuration of global
manufacturing, but so far these technologies are still in their infancy
and their effects are limited. And Ancarani and Di Mauro (2018) find
that only a limited proportion of reshoring activities is characterized by
the adoption of Industry 4.0 technologies, with a slightly higher level in
cost-oriented companies. Overall, a new strand of research on the re-
lationship between backshoring and industry 4.0 appears to be emer-
ging, but empirical evidence so far seems to be very limited.
The paper wants to contribute to this growing branch of the IB lit-
erature by investigating how new production technologies relate to
backshoring decisions of firms. We argue that Industry 4.0 relates to
backshoring in two ways: first, I4.0 production technologies may in-
crease productivity, neutralize the factor cost advantages of offshoring

⁎
Corresponding author.
E-mail addresses: bernhard.dachs@ait.ac.at (B. Dachs), steffen.kinkel@hs-karlsruhe.de (S. Kinkel), Angela.Jaeger@isi.fraunhofer.de (A. Jäger).

https://doi.org/10.1016/j.jwb.2019.101017
Received 6 December 2017; Received in revised form 5 June 2019; Accepted 1 August 2019
Available online 13 August 2019
1090-9516/ © 2019 Elsevier Inc. All rights reserved.
B. Dachs, et al.
locations and make labour arbitrage less appealing. Second, the pro-
mise of more flexibility by I4.0 technologies may provide an incentive
for firms to re-locate production close to their European customers to
regain some of the flexibility lost in fine-sliced global production net-
works. Thus, Industry 4.0 may provide incentives to move production
back to the home country of the firm, and therefore slow down the
further evolution of GVCs. The empirical test of the paper is based on a
large dataset of more than 1700 German, Austrian and Swiss manu-
facturing companies. This dataset includes variables on both, back-
shoring and investments in modern production technologies, and a
number of additional control variables. To our best knowledge, this is
the first paper that examines the impact of the adoption of Industry 4.0
technologies on the propensity of backshoring activities, based on a
large sample consisting of both backshoring companies and a control
group of non-backshoring companies.
The paper is structured as follows: in Section 2 we discuss the main
drivers for backshoring and potentials of Industry 4.0; Section 3 de-
velops the hypothesis; Section 4 describes the data, methodology and
the construction of the main indicator; Section 5 provides descriptive
and multivariate results. The paper closes with a discussion of the re-
sults in Section 6 and conclusions in Section 7.
2. Related literature
2.1. Backshoring and offshoring
Backshoring is the decision to relocate manufacturing activities
back to the home country of the parent company (Arlbjørn & Mikkelsen,
2014; Foerstl, Kirchoff, & Bals, 2016; Fratocchi et al., 2014; Kinkel &
Maloca, 2009). Backshoring can origin from wholly owned production
sites of the company (captive backshoring) as well as from foreign
suppliers (outsource backshoring), thus covering different ownership
modes of manufacturing in the offshore location and home country
(Gray, Skowronski, Esenduran, & Rungtusanatham, 2013).
So far, the main body of literature evaluates the drivers (or moti-
vations) and barriers of the backshoring decision. The most important
reasons for the backshoring of manufacturing activities are quality is-
sues, loss of flexibility and tool long delivery time, the “Made-in” re-
putation effect, the erosion of labour cost gaps, and too high total costs
of sourcing including logistics costs. Technology-related factors like the
loss of know-how or the vicinity of production to R&D seem so far to be
less important for manufacturing companies’ backshoring activities
(Ancarani & Di Mauro, 2018; Ancarani, Di Mauro, Fratocchi, Orzes, &
Sartor, 2015; Arlbjørn & Mikkelsen, 2014; Bailey & De Propris, 2014;
Bals, Kirchoff, & Foerstl, 2016; Canham & Hamilton, 2013; Dachs &
Kinkel, 2013; Ellram, Tate, & Petersen, 2013; Foerstl et al., 2016;
Fratocchi et al., 2014, 2016; Gray et al., 2013; Kinkel, 2012, 2014;
Kinkel & Maloca, 2009; Kinkel, Dewanti, & Zimmermann, 2017; Tate,
Ellram, Schoenherr, & Petersen, 2014; Wu & Zhang, 2014). Gray,
Esenduran, Rungtusanatham, and Skowronski (2017) note that re-
shoring decisions cannot be explained simply by differences in unit
costs, but rather as corrections of offshoring decisions that under-
estimated responsiveness as increasingly important supply chain re-
quirement and some unanticipated problems like quality issues, dis-
ruptions of supply chains, and intellectual property violations. As
reshoring announcements seem to result in positive stock returns that
outweigh the costs of reshoring, some authors even go further and
propose that these additional economic advantages of manufacturing in
high-cost countries need to be taken into account when deciding on
offshoring or reshoring options (Brandon-Jones, Dutordoir, Frota Neto,
& Squire, 2017).
The weaknesses of the legal intellectual property protection system
and a resulting potential loss of know-how are usually considered as
institutional factors of the external environment (Fratocchi et al.,
2016). Skowronski and Benton (2018) point in this context to the im-
portance of boundary spanners to suppliers and other partners in
2
Journal of World Business 54 (2019) 101017
countries with weak IP rights. Massimino, Gray, and Boyer (2017) find
an inconsistent relationship between IPR levels in the respective
country and confidentiality performance, but a positive effect of ag-
glomeration at the developer’s location on confidentiality performance.
Coherent to this, the offshoring of research and development (R&D) to
countries with weak IPR systems seems to be more critical to potential
loss of know-how than the (re-)location of production (e.g. Rilla &
Squicciarini, 2011; Kshetri, 2007), as firms’ exports alone are also
causes for foreign IP infringements (Schmiele, 2013).
There is no explicit theory of backshoring in the IB literature.
Backshoring is explained in the framework of existing theories of the
multinational firm, as a reverse or subsequent decision of a previous
offshoring or internationalization decision (Bals, Jensen, Larsen, &
Pedersen, 2013; Ellram et al., 2013; Foerstl et al., 2016; Gray et al.,
2013; Tate, 2014). Consequently, several theories for explaining the
emergence and development of multinational enterprises are also used
to analyze backshoring decisions. This includes transaction cost eco-
nomics (TCE; e.g. Williamson, 1985), internalization theory (e.g. Buckley
& Casson, 1976; Casson, 2013; Rugman, 2010), the resource-based view
(RBV) of the firm (e.g. Wernerfelt, 1984; Prahalad & Hamel, 1990), and
Dunning’s eclectic paradigm of international production (e.g. Dunning,
1980, 1988, 1998).
This paper focuses on explaining backshoring activities from the
perspective of Dunning’s eclectic framework of ownership, location and
internalization advantages (OLI advantages), as it represents a holistic
framework for the integration of other theories used in this context. In
this perspective, divestment – and thus also backshoring activities – are
part of a dynamic reassessment, relocation and reorganization of ac-
tivities and require the absence of only one of the three OLI determi-
nants (Dunning, 1988, p. 22). Through this lens, backshoring is a result
of a deterioration of the initial ownership and internalization ad-
vantages of a location (e.g. Dachs & Kinkel, 2013; Ellram et al., 2013;
Foerstl et al., 2016) or of changes in the advantages of the host or home
location (e.g. Ellram et al., 2013; Fratocchi et al., 2016), or the con-
sequence of a wrong assessment of these advantages (e.g. Gray et al.,
2013; Kinkel & Maloca, 2009).
2.1.1. Ownership advantages (O)
Ownership advantages are closely linked with the resource-based
view (RBV) of the firm. It emphasizes the search for competitive or
ownership advantages and the importance of organisational processes
and routines that enable firms to use and develop such valuable re-
sources and capabilities (Teece, Pisano, & Shuen, 2002; Barney, 1991;
Teece, Pisano, & Shuen, 1997). Accordingly, firms will invest their
capital in areas where they possess core competences and outsource
non-core activities (Prahalad & Hamel, 1990). Existing and future
competitive strengths and weaknesses of the firm have a major impact
on its sequential investment and divestment decisions (Dunning, 1988,
p. 22). Backshoring decisions may result from the limited abilities of
companies to sufficiently develop such critical capabilities in foreign
locations, or to effectively exploit the host country’s resources in order
to create competitive advantage for the company (Canham & Hamilton,
2013).
Examples of ownership advantages that explain international pro-
duction are capital, technology and organizational advantages, econo-
mies of scale in production or purchasing, knowledge, IPRs, patents,
and trademarks, or a strategic geographical diversification portfolio of
international activities to spread risk (1988, Dunning, 1980; cf.
Table 1). The corresponding ownership or competitive determinants
that can explain backshoring of production activities are depicted in
Table 1 with reference to the respective literature.
2.1.2. Location advantages (L)
Location advantages result from factor endowments between
countries, such as availability of natural resources, labor, market
structure, government legislation and policies (Dunning, 1980, p. 9). In
 B. Dachs, et al.

Table 1
OLI factors affecting offshoring and back-/reshoring decisions.
Factors that trigger FDI / Offshoring Factors that trigger Back-/Reshoringa Available as backshoring motive (backshoring Indirect by potential
fims only) of I4.0 technologies (all firms)

O Capital advantages1 Underutilized production capacity at home9, 15, 18, 19 X -

Technology advantages1 Loss of innovation potential9, 16, 18, 19, 24 - -
Organizational advantages1 Reduced operational flexibility8, 9, 15, 18, 19, 21; X X
Reduced responsiveness to individual customer demands19, 26
Superior R&D capacity, knowledge1 Distance of R&D/innovation to production5, 6, 20, 26, 27 X -
Economies of scale1 (in production and purchasing) and Increased automation and productivity at home base, even at smaller scales/ - X
2
scope volumes5, 6, 27
IPR, patents, trademarks1 IPR theft, loss of know-how9, 10, 15, 17, 19, 26, 27, 28 X -
Made-in effect8, 14, 15, 23, 26, 27
Strategic geographical diversification1, international portfolio Home-base/region market still dominant8, 14, 15, 18, 23 X -
2
to spread risks
15, 18
L Access to local/regional markets1; market size & character2 Diminishing local growth opportunities - -
Proximity to local customers/users3 Long delivery times (i.p. to customers at home base)5, 6, 8, 9, 10, 11, 13, 14, 15, 18, 19, 20, 23, - X
26, 28

Access to different cultures, consumer needs, preferences3
Labor costs1
Access to (and price of) skilled/qualified labor1
Lack of knowledge about foreign destination/market19, 20 - -
Lack of systematic location planning16, 20
Rising wages, eroding labor cost gap5, 6, 8, 9, 13, 14, 15, 16, 18, 19, 20, 23, 26, 28, 29 X -
Higher productivity of staff at home6, 11, 25, 26, 28 - X
Inadequate quality of foreign production5, 6, 8, 9, 10, 11, 13, 14, 15, 18, 19, 20, 21, 22, 28 X -
Lack of skilled/qualified staff, better access at home8, 9, 10, 11, 15, 18, 19, 20, 28 X -

3
Increased competition on qualified staff, high employee turnover8, 11, 18, 20, 27, 28
Access to (and price and quality of) natural resources; Material costs; increased competition on natural resources11, 27, 28
material costs1
Quality of infrastructure3 Low quality of local infrastructure20 X -
20
Local partners, networks, specialized clusters, entrepreneurial Lack of commitment and performance of local partners/ suppliers12, - -
environment3
Trade barriers (e.g. import duties)1 Trade barriers (e.g. for export, re-import) 15 - -
11, 14, 15, 17, 25,
Local investment and tax incentives (at host country)1 Local relocation/(re-)investment and tax incentives (at home country)6, - -
26, 28

Local government support for educational and training
programs3
I Stability of supply and price (vs. uncertain buyer situation)1
1
Control of markets, economies of vertical integration
Transport/logistics costs2
Transaction costs1, e.g. search, information or
negotiation costs2
Risk of supply chain disruption2
Balancing of exchange rates & risks2
Superior educational system at home base20 - -
Low delivery performance of local suppliers (low speed and flexibility, high X -
dependability)5, 6, 8, 11, 12, 14, 18, 20, 23, 26, 28
High control distance/efforts16, 19, 20, 23, 24, 27, 28 X -
Transport/logistics costs (back to home market), X -
high inventory levels, total costs of sourcing8, 9, 11, 14, 15, 19, 24, 28
High costs of internal and external supply chain coordination; Psychic distance X X
between locations8, 9, 18, 19, 20
Risk of supply chain disruption6, 11, 12, 28 - -
Exchange rate risks11, 28 - -

Bold letters: Can be improved by use of Industry 4.0 enabling technologies.

Dunning (1980)1, Dunning (1988)2, Dunning (1998)3 Back-/reshoring factors collected from the following papers on back-/reshoring: Ancarani et al. (2015)4, Arlbjørn and Mikkelsen (2014)5, Bailey & De Propris
(2014)6, Bals et al. (2016)7, Canham and Hamilton (2013)8, Dachs & Kinkel (2013)9, Ellram (2013)10, Ellram et al. (2013) 11, Fine (2013)12, Foerstl et al., 201613, Fratocchi et al. (2014)14, Fratocchi et al. (2016)15, Gray
et al. (2013)16, Kazmer (2014)17, Kinkel (2012)18, Kinkel (2014)19, Kinkel and Maloca (2009)20, Kinkel et al. (2007)21, Kotlarsky & Bognar (2012)22, Martínez-Mora & Merino (2014)23, McIvor (2009)24, Moutray & Swift
(2013)25, Pearce (2014)26, Tate (2014)27, Tate et al. (2014)28, Wu & Zhang (2014)28.
Journal of World Business 54 (2019) 101017
B. Dachs, et al.
international trade theory, differences in these factor endowments fully
explain the international differentiation and specialization of multi-
national enterprises. In the past decades, the rapid international ex-
pansion of MNEs was fueled by substantial labor cost differentials,
lowering of import barriers for intermediate goods, and lower cost of
cargo transport. According to Dunning, MNEs would reduce their ac-
tivities in a foreign country when local factor endowments change and
weaken their competitive advantages, causing them to switch produc-
tion back to the home country – or to other host countries (Dunning,
1988, p. 22). Hence, also backshoring will reflect changes in the
availability and costs of factors between countries that improve the
comparative advantages and attractiveness of production in the home
country (Martínez-Mora & Merino, 2014; Wiesmann et al., 2017).
There are many examples of location advantages that explain in-
ternational production (cf. Table 1): Market size and character, access
to local markets, proximity to local customers and to (lead) users, ac-
cess to different cultures, consumer needs, and preferences, labor and
material cost differentials, access to and price of qualified labor and
natural resources, quality of infrastructure, presence of local partners,
networks, specialized clusters, entrepreneurial environment, trade
barriers, local investment and tax incentives or government support for
educational and training programs (1988, Dunning, 1980, 1998). The
corresponding location factors that can explain backshoring activities
are depicted in Table 1 with reference to the respective literature.
2.1.3. Internalization advantages (I)
Internalization advantages go back to transaction cost economics
(TCE, e.g. Williamson, 1985). TCE point to importance of transaction
cost in inter-firm trade caused by market imperfections and the re-
sulting high costs for negotiation, coordination, and control. From a
buyer's perspective, firms are internalizing such imperfect markets to
seize control over the availability and price of essential supplies and
their timing and delivery. From a seller's perspective, firms are inter-
nalizing markets to enable price differentiation, enforce rights, control
information flows, or protect product quality, service quality and
company reputation (Dunning, 1980). Transaction costs – and thus also
the propensity of internalization of activities – tend to increase with the
level of possible opportunistic behavior, bounded rationality, the level of
uncertainty, and the specificity of tasks and assets involved (e.g.
Williamson, 1985; Pisano, 1990; Pisano & Shih, 2009; Cabral, Quelin, &
Maia, 2013). Therefore, internalization theory considers direct control
– via internalization – over scarce, firm-specific, knowledge-based re-
sources and capabilities as the most efficient way for a firm to inter-
nationalize its activities (Casson, 2013; Rugman, 2010). Examples of
internalization advantages that explain international production are (cf.
Table 1) the stability of supply and price of own production and supply
vs. an uncertain buyer situation, control of intermediate and final
product markets, economies of vertical integration, internal transport
and logistics cost advantages, transaction cost advantages, e.g. search,
information or negotiation costs, a lower risk of supply chain disruption
and the potentials of balancing exchange rates and risks internally
(Dunning, 1980, 1988, 1998). Moreover, over the past years, the in-
ternational expansion of multinational firms was strongly fueled by the
rapid development of ICTs that supported trans-border communication
and coordination and lowered the associated internal transaction costs
(Dicken, 2014).
TCE can also be applied to explain the disadvantages of intra-firm
trade of intermediate goods across subsidiaries and countries (Dunning,
1980). In this sense, high and growing transaction costs at the offshore
location and in the trans-border supply chain back to the home base can
be strong arguments for re-concentrating manufacturing activities via
backshoring. They are sometimes referred to as the ‘hidden’ costs of
global sourcing and can lead to inaccuracy of the projected cost and
offshore performance (Cabral et al., 2013; Pisano & Shih, 2009; Pisano,
1990), to higher than expected costs, poorer than expected quality, and
higher than expected efforts for the management of trans-border
4
Journal of World Business 54 (2019) 101017
activities (Fredriksson & Jonsson, 2009; Tate, Ellram, Bals, &
Hartmann, 2009). Manufacturing offshoring decisions may also lead to
a higher level of uncertainty with regard to the perceived degree of
volatility and unpredictability in a foreign market, incorrect forecasts,
unforeseen cost increases, quality and flexibility issues, raw material
shortages, or currency fluctuations (Ellram et al., 2013; Foerstl et al.,
2016; Gray et al., 2013; Kinkel & Maloca, 2009; Tate et al., 2014). This
can lead to excessive coordination and monitoring efforts such as ad-
ditional travelling expenses, to rising transportation cost or to high
amounts of working capital in safety stock (Handfield, 1994; Holweg,
Reichhart, & Hong, 2011; Lewin, Massini, & Peeters, 2009; Nassimbeni,
2006; Ritter & Sternfels, 2004; Tate, Dooley, & Ellram, 2011). In ad-
dition, the geographical and cultural distance to the offshore location
can raise the risk of opportunistic behaviour by either foreign suppliers
(Kinkel & Maloca, 2009; McIvor, 2009) or own production sites abroad
(Kinkel & Maloca, 2009; Martínez-Mora & Merino, 2014). However,
case studies have shown that managers still tend to offshore manu-
facturing activities based on simple comparisons of easily measurable
costs, in particular labor costs (Kinkel & Maloca, 2009). Table 1 sums
up the main internalization and transaction cost factors for explaining
backshoring activities with reference to the respective literature.
2.2. Industry 4.0
Many observers today agree that we are witnessing a technological
revolution in manufacturing (Brynjolfsson & McAfee, 2014; Ford, 2015;
OECD, 2016, 2017). This revolution is based on a variety of digital
production technologies (e.g. sensors, actuators, horizontally and ver-
tically integrated production, robots, additive manufacturing), new IT-
enabled management processes (e.g. real-time enterprise resource
planning and production control, data analytics, applications of artifi-
cial intelligence), and new business and revenue models.
In the manufacturing context, the vision of a comprehensive use of
these technologies is often labelled as the Fourth Industrial revolution –
after mechanization, electrification, and automation – or Industry 4.0, a
term that is widely used in the debate in the European Union
(Bauernhansl, 2014; Kagermann et al., 2013; Spath et al., 2013). The
most striking feature of Industry 4.0 is that components and machines
autonomously communicate and co-ordinate their operations in fac-
tories and value chains (Bauernhansl, 2014; Brennan et al., 2015;
Kagermann et al., 2013; OECD, 2017; Spath et al., 2013; UNCTAD,
2017). A main component of Industry 4.0 are Cyber Physical Systems
(CPS). CPS comprise “smart machines, warehousing systems and pro-
duction facilities that have been developed digitally and feature end-to-
end ICT-based integration, from inbound logistics to production, mar-
keting, outbound logistics and service” (Kagermann et al., 2013, p. 14).
This can be done by embedding technology that can take on tasks like
sensing or automation into physical objects and connecting them via
the Internet. In other words, CPS are supposed to integrate all stages of
the physical production process over the Internet, in order to create a
seamless exchange of information between these two worlds. This will
allow for intelligent, real-time, horizontal and vertical integration of
value-added processes and business models (Kagermann et al., 2013).
The goal of Industry 4.0 is a highly flexible and at the same time
highly efficient manufacturing process, which allows to produce in-
dividualized products under the economic conditions of a mass pro-
ducer (Lichtblau et al., 2015). Thus, firms can expect two main benefits
from Industry 4.0:
• Increases in productivity and capacity utilisation may lead to lower
production costs at the respective factory (Kagermann et al., 2013;
Spath et al., 2013; Bauernhansl et al., 2014; Jäger et al., 2015). The
intensive use of I4.0 technologies may reduce the necessary labour
input and shift the ratio between capital and labour inputs in favour
of capital. Thus, I4.0 may compensate locational advantages of low-
wage countries, making labour arbitrage in low-wage countries less
B. Dachs, et al.
appealing and economies of scale of factory sites in developed
countries more important.
• Real-time control may lead to a higher flexibility and quality of the
production process and enables customized production with very
low marginal cost (Lichtblau et al., 2015). This may open new
market segments to firms, particularly in developed countries. These
new market opportunities can only be successfully approached if the
customized goods can also be delivered quickly, calling for a
minimum time between order and delivery. In times of Amazon, no
customer is willing to wait for a product order longer than some
days.
3. Hypothesis development: how Industry 4.0 technologies relate
to offshoring and backshoring decisions
Recent research has provided a number of arguments how the
adoption of Industry 4.0 technologies might influence the spatial dis-
tribution of global value chains and offshoring and backshoring deci-
sions. According to De Backer and Flaig (2017), digitization of pro-
duction is probably the biggest driver for changing future global value
chains. It has the potential to reduce the benefits of production in low-
wage countries (by a lower share of labour and higher productivity in
production), make offshoring of production to low-wage countries less
attractive, backshoring more attractive and global value chains less
fragmented and shorter. Strange and Zucchella (2018) assume that the
increasing spread of Industry 4.0 technologies has the potential to
change the location and organization of production worldwide. Auto-
mation allows further productivity increases and improved human-
machine and machine-machine interaction enables better product
adaptation and individualization. As a result, companies will base their
location decisions less on production costs than on proximity to cus-
tomers. This will facilitate the transition from centralized to decen-
tralized supply chains, with a stronger focus on localization and ac-
cessibility (Strange & Zucchella, 2018). Stentoft, Rajkumar, and Skov
Madsen (2017) also find in a study on Industry 4.0 in Danish Industry
that companies that backshore production activities or stay at home
rate the degree of automation and digitisation of their production
higher than other companies. Ancarani and Di Mauro (2018) find evi-
dence that backshoring activities are gaining momentum with the in-
troduction of new technologies. In particular cost- or quality-oriented
backshoring strategies are accompanied by motives to use Industry 4.0
technologies at home. In the most actual contribution, Ancarani, Di
Mauro, and Mascali (2019) find that backshoring has so far rarely been
stimulated by the introduction of new technologies at home. However,
their findings suggest that backshoring is associated with the in-
troduction of Industry 4.0 technologies if the companies’ priorities are
to increase productivity or to improve product quality.
Overall, the increasing digital integration of production processes
seems to promote the trend towards stronger regional value chains (De
Backer, Menon, Desnoyers-James, & Moussiegt, 2016). Due to the
technologically feasible lower share of labour in production, high
productivity potentials and an increasing demand for customized pro-
ducts in high-wage countries, international fragmentation of production
is becoming less attractive, and there is a trend towards a rebalancing of
the world economy towards the developed economies because (De
Backer & Flaig, 2017; Strange & Zucchella, 2018).
I4.0 technologies– via the productivity and flexibility effects de-
scribed above– might influence OLI advantages and provide incentives
for firms to relocate production back to the home country. I4.0 tech-
nologies, even at small production volumes, provide a clear ownership
advantage (cf. Table 1) and may offset the labour cost differentials firms
are enjoying in offshore locations. The potential of I4.0 technologies to
realize a higher degree of flexibility (cf. Table 1) – while at the same
time keeping a high productivity level – helps the firm to reduce lead-
time and improve market orientation. The intensive use of I4.0 tech-
nologies can also improve the responsiveness to individual customer
5
Journal of World Business 54 (2019) 101017
demands and the ability to process many different variants of custo-
mized products with reasonable cost (cf. Table 1). As some offshoring
initiatives seem to have reduced the ownership advantages of opera-
tional flexibility and responsiveness to individual customer demands
(cf. Table 1), companies may find it attractive to limit these restrictions
via backshoring and make use of the full flexibility and customization
potential of I4.0 technologies at their home (lead) plants. The higher
the investments in such advanced production technologies are, the
higher the need for a high capacity utilization to improve the ownership
advantages of these investments (cf. Table 1) and the higher the pos-
sibility to integrate these manufacturing operations at one focal plant,
favoring backshoring rather than additional offshoring activities. By
reducing the costs of flexibility and customization in firms’ own (in-
house) production processes and plants, I4.0 technologies also provide
internalization advantages (cf. Table 1) against outsourced options that
have been regarded more flexible in the past, favoring backshoring and
insourcing against outsourced and offshored activities. In addition, a
flexible short-term delivery of individualized products is only feasible if
the manufacturing site of the customized product is located closely to
the customer (cf. L (dis)advantages in Table 1) – which in most cases of
customized products is situated in developed countries – again fa-
vouring backshoring of manufacturing activities from low-wage to
high-wage countries. Hence, proximity to the customer may be in-
creasingly competing with the long-time dominating global value
chains and their complexity and flexibility disadvantages, especially in
the case of short-term and individual customer requests (Kinkel, Rieder,
Horvath, & Jäger, 2016).
On the other hand, historical experience demonstrates that new
technologies rather favor production fragmentation in GVCs. The use of
new technologies, such as I4.0, leads to technological and organiza-
tional ownership advantages of the respective companies (cf. Table 1).
These companies want to exploit these advantages in all attractive
markets, stimulating captive FDI and offshoring activities (Dunning,
1988). High investments in such innovative technologies will ceteris
paribus increase the importance of economies of scale in production (cf.
Table 1), making FDI for internal use of these ownership advantages
more likely (Dunning, 1988). In particular, ICTs – which is an ele-
mentary part of I4.0 – may have a strong effect on economic geography,
as it allows for remote coordination of captive and outsourced foreign
operations and thus renders local agglomeration futile (Leamer &
Storper, 2001). This results in lower efforts for (internal and external)
trans-border supply chain coordination (cf. Table 1), reducing the
transaction costs, risk and uncertainty of proprietary and outsourced
offshoring activities and making them less coordination intensive. This
might soften the internalization disadvantages of offshored or out-
sourced production activities by reducing the cost of internal and ex-
ternal supply chain coordination (cf. Table 1) and thus providing in-
centives to stay offshore or maintain the outsourced production mode.
This argument is also in line with Buckley’s concept of the’ global
factory (Buckley & Ghauri, 2004; Buckley, 2011), claiming that new
technologies allow firms to ‘fine slice’ value-adding activities and locate
them in their optimal place, as these technologies support sufficient
coordination and control at a distance, even when not owning all of the
supply chain. However, local agglomerations and clusters of companies’
activities still exist. Local agglomerations and global integration via
ICTs does not seem to be an ‘either/or’, rather a ‘both/and’ phenom-
enon (Alcácer et al., 2016).
Against this background, we argue that the potentials of Industry
4.0 technologies to improve specific OLI advantages for backshoring
activities (in particular increased productivity and responsiveness to
individual customer demands) might be superior to their potentials to
improve specific OLI advantages for offshoring activities (in particular
internal and external trans-border coordination). Overall, I4.0 tech-
nologies may put firms in the position to backshore production activ-
ities. Therefore, we pose the following hypotheses:
B. Dachs, et al. Journal of World Business 54 (2019) 101017

H1. A more intensive use of Industry 4.0 technologies in manufacturing 4.2. Industry 4.0 index
companies is associated with a significantly higher propensity to perform
backshoring activities. We measure the use of Industry 4.0 technologies with an array of
questions if the firm utilized a specific technology or not. Here, the
reference year for implementation is 2014 or earlier. However, some
very innovative Industry 4.0 technologies are so far (or have been by
4. Data and method
then) not simply available on the market and thus are only used by a
few pioneering companies. This poses a challenge for measuring the
4.1. Sample
diffusion of these technologies in a representative sample of manu-
facturing companies containing many small and medium-sized en-
We test the association between backshoring and Industry 4.0 with
terprises (SMEs). Hence, we focus on a set of eight Industry 4.0 tech-
data from the European Manufacturing Survey (EMS) 2015. The EMS is
nologies that are already available on the market and thus can also be
a firm-level survey that investigates product, process, service and or-
adopted by SMEs (cf. Table 2) – albeit large companies might use them
ganisational innovation in European manufacturing. EMS is organized
to a larger extent (cf. Table 5).
by a consortium co-ordinated by the Fraunhofer Institute for Systems
We use the information on the utilization of these technologies to
and Innovation Research (ISI).1
create an index of I4.0 technologies (i4index) that captures the in-
The data set employed in this paper is a sub-set of the EMS 2015
volvement of the firm in these technologies on a detailed basis. Stronger
survey and includes 2120 manufacturing firms from Austria, Germany
involvement indicated by a higher index value reveals more intensive
and Switzerland with at least 20 employees. We selected these three
use of Industry 4.0 technologies as more of these advanced production
countries because they are comparable in many indicators, including
technologies have been implemented.
their manufacturing share on GDP. The EMS 2015 measures back-
We construct an additive involvement index that resembles the
shoring with a question if the firm has relocated production activities
index used in Bozeman and Gaughan (2007, 2011) and in Gaughan and
from own affiliates or from suppliers back to the home country during
Corley (2010). It is constructed by first identifying the technologies that
2013 and 2014. As a consequence, backshoring is not just disinvestment
a firm currently utilizes. Each of these instances of technology usage is
of own assets abroad; it also relates to activities which have been
then weighted with the inverse of their relative frequency in sample,
contracted out to third parties and moved back from these foreign
and the sum is computed. Table 3 below gives an example of the cal-
suppliers or providers. Accordingly, we excluded all firms with no
culation. This procedure weights up (relatively) rare utilization of
foreign production sites and no imports of intermediary goods from
technologies, which is typical for new technologies, and weights down
abroad to limit the sample to firms which have done captive offshoring
(relatively) common and mature ones. The relative frequency of tech-
or offshore outsourcing. So, only firms that are engaged in one (or both)
nology utilization in the sample is reported in in the Annex.
of those forms of offshoring are included in the sample. Moreover, we
The computation of the index is illustrated in the table below.
excluded firms which provided no information on backshoring, and the
Consider a firm initially utilizing only systems for automation of in-
number of employees.
ternal logistics and technologies for safe human-machine interaction.
The final sample includes 1705 firms, 947 of them from Germany,
Automated internal logistics is used by 34% of all firms in the sample,
567 firms from Switzerland and 191 firms from Austria. The most fre-
while technologies for safe human-machine interaction only by five
quent sectors in the sample are manufacturers of fabricated metal
percent. The resulting index value is 1.61.
products, the machinery industry, manufacturers of electrical equip-
In addition to the weighted index, we also prepared an unweighted
ment, electronic and optical products, and the food industry (see
version for robustness checks by simply counting the number of I4.0
Table 6, first column).
technologies employed by each firm.
The coverage of the identified backshoring drivers in the EMS da-
tabase is also shown in Table 1. As it turns out, most of these drivers,
4.3. Dependent and independent variables
especially from the L and I dimension, can only be captured by direct
questions to those companies that have actually backshored. For these
Table 4 below gives an overview of the dependent and independent
factors, it is therefore not possible to test them in an explanatory model
variables used in the analysis. The dependent variable is backshoring
in comparison to companies that did not backshore – as the latter are
(back), a dummy variable which is one if the firm has backshored
simply not able to answer questions on why they moved activities back.
production activities to the home country in 2013 or 2014, and zero
The possibility of testing the significance of factors for the backshoring
otherwise. These can be own production activities, or production which
propensity of companies is thus limited to some factors from the O
has been sub-contracted to an independent supplier.
dimension and to structural characteristics (e.g. size, sector, production
Independent variables include the size of the firm measured by the
mode, etc.) of the companies surveyed.
number of employees (emp), the I4.0 index (i4index), the share of ex-
The EMS survey covers the majority of the most important, directly
ports on turnover (exp), and a dummy (aprod) that is one if the firm has
retrievable motives for production backshoring. The potential motives
own production activities abroad and zero otherwise. Since we also
uncovered by the EMS are shown in Table 1. According to previous
consider backshoring from foreign suppliers, aprod is not necessarily
findings, this includes rather marginal drivers for backshoring activ-
one for all backshoring firms.
ities; the exception is the made-in effect, which was identified in some
To control for sectoral affiliation, we use variables that describe the
studies as a relevant explanatory factor (e.g. Fratocchi et al., 2014,
technological regime the firm operates in, following the taxonomy of
2016; Martínez-Mora & Merino, 2014; Pearce, 2014, Tate, 2014). It is
Marsili and Verspagen (2002). This sectoral taxonomy is a better mirror
assumed that the explanatory factors shown in bold type can be posi-
of sectoral differences related to production technology than the usual
tively influenced by the use of industry 4.0 technologies and that they
classification of sectors according to their technology intensity. The
therefore also positively influence the backshoring propensity of the
taxonomy distinguishes five technological regimes: Continuous Process
respective company. Overall, the factors covered by the EMS survey
(the base case - Food, beverages, textiles, paper, wood, printing, mi-
cover the most important backshoring drivers, thus allowing a com-
neral products, basic metals), Fundamental Process (reg_fp: petrol,
prehensive analysis of the underlying patterns.
chemicals), Complex Systems (reg_cs: automotive), Science Based
(reg_sb: pharmaceuticals, electronics), and Product-engineering (reg_pe:
metal products, machinery, electrical products).
1
http://www.isi.fhg.de/i/projekte/survey_pi.htm. In addition, we include a dummy variable that is one if the firm is a

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B. Dachs, et al. Journal of World Business 54 (2019) 101017

Table 2
Technologies used to construct an index of I4.0 technologies.
Source: EMS 2015
Technologies
Product-Lifecycle-Management Systems
Additive Manufacturing (for prototyping or production)
Digital Visualisation
Digital Exchange of data with suppliers / customers
Systems for automation of internal logistics
Near real-time production control systems
Technologies for safe human-machine interaction
Mobile/wireless devices for providing services
Table 3
Example computation of the I4.0 index.
Source: EMS 2015
Systems for automation of internal logistics
Technologies for safe human-machine interaction
For all other technologies not employed
Involvement index
event in the sample (p < 5%) – so a simple logit or probit model does
not seem adequate because it would result in biased coefficients (King &
Zeng, 2001; Williams, 2018). As a remedy, Williams (2018) proposes
penalized likelihood to reduce small-sample bias in maximum like-
lihood estimation. This approach shrinks the coefficients of the less
contributive (and thus irrelevant) variables toward zero. For estimating
the regression, we use the firthlogit command which is available for
STATA.
We estimate the following model:
Y * = X ′β + ε
where Y* can be viewed as an indicator for whether the latent depen-
dent variable Y – the probability to backshore - is positive or not:
1ifY * > 0i.e.X ′β + ε > 0
Y = 1{Y * > 0} = ⎧
⎨
⎩ 0otherwise
1*(1-0.34) + with X’ denoting the vector of explanatory variables from Table 4 and β
1*(1-0.05) +
0*(1-…)
being the parameter reflecting the marginal effect of a discrete change
1.61 in the probability to backshore for the explanatory variables. ε is the
error term, which is assumed to be of zero mean and with a standard

Table 4
Definitions of the variables.
Source: EMS 2015
Variable Label Definition Variable Type

back Backshoring; the variable is one if the firm has backshored production in 2013 or 2014, and zero otherwise. Dummy
emp Number of employees in 2014 Metric
i4index I4.0 technologies index described in Section 4.2 Ordinal
exp Share of exports on turnover of the firm Metric
aprod Production activities abroad; the variable is one if the firm has production abroad, and zero otherwise. Dummy
reg_cp, reg_fp, reg_sb, reg_cs, Sectoral variables that describe the technological regime the firm operates following the taxonomy of Marsili and Verspagen Dummy
reg_pe (2002). Base case is the continuous process regime (reg_cp).
supp Position in the value chain; the variable is one if the firm is a supplier to other firms, and zero if the firm is a producer of final Dummy
products.
AT, CH, DE Location of the firm; AT for Austria and CH for Switzerland, with Germany (DE) as the base case. Dummy
batch Batch size; the variable is one if the firm produces single pieces, and zero if it produces in larger batches. Dummy
complex Degree of complexity of the main product; this variable is one if the firm produces predominantly products consisting of many Dummy
parts, and zero if the products consist of only a few parts or single parts.

supplier to other firms (supply), and two variables that identify firms
which produce in single pieces (batch) and/or produce complex pro-
ducts (complex). These variables control for some important firm
characteristics influencing backshoring behaviour. Many suppliers have
followed their industrial customers to offshoring locations and thus may
have fewer incentives to return than producers of final products that
(also) serve the European market. The production of similar goods in
large batches needs high productivity and less flexibility and may give
less reason for backshoring. Producing complex products may require
closer interaction with local suppliers, at home and at the foreign lo-
cation, making selective backshoring strategies a useful option for some
of these firms. Finally, two dummy variables (AT and CH) identify firms
from Austria and Switzerland. The base case are firms from Germany.
The motives for backshoring activities identified in the survey are
presented and discussed in a descriptive analysis. As discussed above,
they cannot be integrated into the explanatory model for the back-
shoring propensity of manufacturing companies, since they only occur
in backshoring cases.
4.4. Method
We test the hypothesis of a positive relationship between I4.0 pro-
duction technologies and backshoring with descriptive statistics and a
regression that relates backshoring to the index of I4.0 technology use
described above – and a number of control variables. There is only a
small number of cases where we can observe reshoring – it is a rare
deviation of σ2.
5. Results
5.1. Descriptive results
This section presents the distribution of the backshoring and the
Industry 4.0 variables across firms. Overall, we see a small share of
manufacturing firms which have backshored production activities. In
total, the share of backshoring firms is 4.2% of all firms in the sample.
We can further distinguish between backshoring from suppliers and
backshoring from own subsidiaries. 2.2% of the firms have backshored
from suppliers, while 1.8% backshored from their own subsidiaries
abroad. The rest of the backshoring firms did not provide this in-
formation.
Backshoring increases with size; the highest shares of backshoring
firms are found among firms with 250–499 employees (see Table 5).
The likelihood to find a backshoring firm is highest in the chemicals,
the pharma and the transport equipment industry (Table 6).
The most important reasons for backshoring are the lack of flex-
ibility at the offshoring location and a low quality of the goods pro-
duced (Fig. 1). Both reasons are relevant in more than half of all
backshoring decisions. A lack of flexibility and low production quality
points to a wrong assessment of location and internalisation ad-
vantages. The problem of low product quality may also result from the
challenge of transferring assets and resources within the company and

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B. Dachs, et al. Journal of World Business 54 (2019) 101017

Table 5 productivity, and may also improve the quality of the products because
I4.0 technologies and backshoring in different firm size classes. of a higher degree of real-time control over the production process.
Source: EMS 2015, own calculations In a second step, we look at I4.0 and the frequency of backshoring in
Size class No. of firms i4index (mean) Backshoring (% of firms) different size classes (Table 5) and sectors (Table 6). In the tables, I4.0
is the mean of the firm values of the I4.0 technologies indicator de-
< 30 240 1.50 1.3% scribed above for each size class and each sector. Backshoring indicates
30-49 381 1.64 3.1%
the share of firms which have backshored production activities between
50-99 405 1.74 3.7%
100-249 409 2.34 5.4% 2013 and 2015 in their size class or sector.
250-499 159 2.41 8.2% The data shows a clear tendency that increasing firm size is related
500-999 70 2.81 5.7% to both, higher i40index values as well as a higher backshoring pro-
≥ 1000 41 3.00 7.3%
pensity. The i40index is highest among the largest firms, which also
Total 1705 2.02 4.2%
have the second-highest backshoring propensity. The opposite can be
found among the smallest firms with less than 30 employees. Overall,
Table 6 the correlation between the number of employees and the i4index at
I4.0 technologies and backshoring in different sectors and technological re- firm level is only 0.05, as can be seen from the correlation table in
gimes. Annex 4.
Source: EMS 2015, own calculations At the sectoral level, we see very low values of the i40index in low-
technology sectors such as food and beverages, textiles and clothing and
Sectors No. of firms i4index (mean) Backshoring (% of firms)
wood, paper and printing, while highest values can be found in elec-
Food, beverages 118 1.65 1.7% trical, electronics and among the manufacturers of vehicles and plastics
Textiles, clothing 47 1.50 4.3% products. Vehicles is also the sectors with the second-highest share of
Wood, paper, print 151 1.90 2.6%
backshoring firms, while the sectors with the highest share of back-
Pharma, chemicals 120 1.80 10.0%
Plastics 120 2.14 4.2% shoring firms – pharmaceuticals and chemicals – has only an average
Mineral products 80 1.77 3.8% i40index value.
Metal, metal products 363 1.92 3.0% The relationship between i4.0 and backshoring is also confirmed by
Electrical, electronics 253 2.13 5.1% a t-test of the mean of the variable i4index (see Table 7 below). This test
Machinery 303 1.94 3.3%
confirms a significantly higher i4index value for firms that have back-
Transport equipment 55 2.35 9.1%
Other 95 1.96 5.3% shored production activities compared to firms that have not back-
Total 1705 1.94 4.2% shored.
Technological regimes
Continuous process 492 1.81 2.4%
Fundamental process 88 1.79 6.8%
5.2. Results from the multivariate regression
Complex systems 55 2.35 9.1%
Science-based 285 2.10 6.7%
Product engineering 785 1.95 3.8% We now look for the relationship between backshoring propensity
Total 1705 1.94 4.2% and the use of industry 4.0 technologies as well as relevant firm char-
acteristics in a multivariate set-up. Table 8 reports results for of the
penalized logit model and marginal effects for the coefficients of
dummy variables. We employ four different variants of the regression
(columns 1–4). Regression (1) uses the full sample of all firms with
either own production capacities abroad or inputs from foreign sup-
pliers and sectoral dummies. The second model (2) in addition includes
batch and complex. Batch size and product complexity are alternative
ways to look at heterogeneity across firms and appear in all sectors to a
varying degree. Finally, in regressions (3 and 4) we have dropped emp
(3) and i4index (4) to check for a possible multicollinearity. To allow a
comparison of the models with AIC and BIC statistics we excluded 72
cases with missing values in one of the independent variables.
To check for multicollinearity, we calculated variance inflation
factors for model (2), the model with the largest number of independent
Fig. 1. Motives for backshoring. variables. There is no indication for multicollinearity (see Annex 5).
Moreover, emp remains insignificant if we exclude i4index from the
develop such assets in or adapt them to foreign environments. A third regression in model (4).
important reason are unemployed capacities in the home country. A
perceived loss of know-how due to involuntary spillovers is the least Table 7
relevant reason for backshoring. Moreover, firms do not seem to Two-sample t-test with equal variances.
Source: EMS 2015, own calculations
backshore because they suffer from a separation of production and R&D
activities; the co-location of both activities at home does not seem to be Group Obs Mean Std. Err. Std. Dev. [95% Conf. Interval]
an important reason for backshoring and thus not a pressing challenge
no backshoring 1,633 1.915 0.027 1.086 1.862 1.967
for firms.
backshoring 72 2.503 0.138 1.169 2.229 2.778
Quality and flexibility as the most important reasons for back- combined 1705 1.939 0.027 1.096 1.888 1.992
shoring show a high consistency over time. They have also been the diff −0.588 0.131 −0.846 −0.331
most frequent answers in the surveys of 2010/12 and 2007/09 (see diff = mean(no) - mean(yes) t = -4.4835
Dachs & Zanker, 2014). Hence, the most frequent reasons for back- Ho: diff = 0 degrees of freedom = 1703
Ha: diff < 0 Ha: diff ! = 0 Ha: diff > 0
shoring clearly link to the advantages of Industry 4.0 technologies, Pr(T < t) = 0.0000 Pr(|T| > Pr(T > t) = 1.0000
which – as discussed above – can provide a higher degree of flexibility, |t|) = 0.0000

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B. Dachs, et al. Journal of World Business 54 (2019) 101017

Table 8 model (3). AIC also prefers model (4) over model (3). Altogether, the
Backshoring and Industry 4.0: regression results. models correctly predict around 84% of all observations.
VARIABLES (1) (2) (3) (4) We also compared the models with likelihood-ratio (LR) tests. A LR
back back back back test of model (1) and model (2) results a chi2 value of 0.038, so adding
complex and batch significantly increases the fit of the model although
emp −0.000 −0.000 −0.000
both are not significant. LR tests of model (2) and model (3) and (4)
(0.000) (0.000) (0.000)
i4index 0.256** 0.247** 0.258**
respectively show that the addition of emp and i4index both increase the
(0.104) (0.105) (0.105) fit of the model with error levels of less than 1% each. We therefore
exp 0.007 0.008 0.007 0.008* consider model (2) as most relevant for the analysis.
(0.005) (0.005) (0.005) (0.005)
aprod 1.333*** 1.308*** 1.328*** 1.444***
5.3. Robustness checks
(0.271) (0.271) (0.271) (0.267)
reg_fp 0.549 0.498 0.562 0.486
(0.533) (0.535) (0.532) (0.528) Model (4) checks the robustness of the model by excluding the
reg_cs 1.256** 1.292** 1.196** 1.348** variable i4index. The variable emp remains insignificant even if we
(0.564) (0.565) (0.565) (0.560)
exclude i4index from the regression in model. Moreover, we checked
reg_sb 0.651 0.672* 0.655 0.668*
(0.406) (0.408) (0.406) (0.405)
the robustness by using alternative measures for firm size, emp. In one
reg_pe 0.178 0.250 0.184 0.175 regression not reported here we used its logarithmic form, in another
(0.362) (0.365) (0.362) (0.361) regression we employed the turnover of the firm as alternative mea-
supp −0.973*** −1.000*** −0.961*** −0.918*** sures for firm size. The i4index remained significant in these two var-
(0.311) (0.312) (0.310) (0.308)
iants of the regression. Turnover and the number of employees are
at 0.386 0.362 0.402 0.372
(0.384) (0.387) (0.383) (0.382) highly correlated, so we did not use both variables in one regression.
ch 0.147 0.145 0.160 0.124 We also tested an alternative, unweighted form of i4index in regres-
(0.292) (0.292) (0.290) (0.290) sions. This index is compiled by simply counting the number of I4.0
complex −0.202 technologies employed by each firm. The coefficients for both variants,
(0.278)
batch 0.304
the weighted and the unweighted index turn out to be significant in
(0.347) regressions.
Constant −4.616*** −4.796*** −4.618*** −4.156***
(0.409) (0.488) (0.409) (0.351) 6. Discussion
Observations 1,629 1,629 1,629 1,629
Prob > chi2 0.0000 0.0000 0.0000 0.0000
AIC 476.2022 473.6437 495.686 484.4108 We investigated the relationship between backshoring of production
BIC 540.9508 549.1838 555.0389 543.7638 activities and investments in Industry 4.0 technologies in European
manufacturing firms. Descriptive statistics as well as regression results
Standard errors in parentheses, *** p < 0.01, ** p < 0.05, * p < 0.1. indicate a positive and significant association between these two vari-
ables. This positive association can, at first, be explained by the po-
The results in columns (1), (2) and (3) indicate that the coefficient tentials of I4.0 technologies for productivity increases (Brynjolfsson &
for the I4.0 technology index (i4index) is significant and positively re- McAfee, 2014; Kagermann et al., 2013; Bauernhansl et al., 2014), by
lated with backshoring. This confirms the results from the descriptive increasing co-ordination between various steps of the production pro-
analysis. cess, making it more capital and less labour intensive. As a result, this
The size of the firm (emp) is not relevant for the explanation of improves the ownership advantages of a higher automation and pro-
backshoring once we control for all other variables. One additional ductivity level in manufacturing (1988, Dunning, 1980), making value-
employee has a very, very small effect on the dependent variable, as can adding activities and high capacity utilisation at the home base more
be seen by the value of the coefficient which is almost zero. So, the rewarding and ceteris paribus labour arbitrage in low-wage countries
positive correlation between backshoring and firm size we saw in de- less appealing. The use of I4.0 technologies might also enable a
scriptive statistics can rather be explained by the i4index variable, smoother integration of production processes with suppliers, leading to
which increases with firm size just like backshoring. lower costs of internal supply chain coordination, and thus higher in-
The analysis also reveals some differences between sectors. centives to re-internalize foreign supplier activities.
Companies in a complex systems regime (mainly the automotive in- A second explanation is related to the potential of I4.0 technologies
dustry) display a higher backshoring propensity than companies pro- to support the production of customized products with the cost ad-
ducing in continuous processes. Being a supplier (supp) reduces the vantages of large scale production, and to significantly increase the
likelihood of backshoring in all specifications of the regression sig- quality and speed in such customized manufacturing processes. To be
nificantly. The coefficients for product complexity and batch size are able to deliver such customized products with short lead-time, pro-
not significant in model (2). Firms which produce mainly single pieces duction needs to be located in proximity to the client. In most cases of
or small batches (compared to larger batch sizes), or complex products customized – and thus usually slightly more expensive – products,
(compared to simple products) have no higher backshoring propensity customers are mainly situated in developed countries and thus provide
once we control for all other factors. Since complex and batch dummies a location advantage over low-wage countries, leading to backshoring
did not reveal explanatory power in (2), we exclude it in equations (3 rather than to further offshoring activities. One indicator could be the
and 4). There is no difference between firms with respect to their home export intensity of the surveyed companies, which is not higher for
location. So, Austrian or Swiss firms have no higher or lower back- backshoring companies in all calculated models. The average export
shoring probability than German firms once we control for all other intensity of all companies in the sample is 42%, indicating that the
factors in the regression. majority of sales is still created in the home country – and perhaps in
The last lines of Table 8 report some measures to evaluate the fit of some large neighbouring countries such as France, the Netherlands or
the models. The Wald test indicates that the independent variables to- Germany (in the case of Austrian and Swiss companies), which count as
gether differ significantly from zero for all four models. The AIC value exports but can very well be deliveries to a neighbouring region.
for model (2) is smallest, so we consider model (2) to be the best fitting. Backshoring may become also an interesting option for firms when
The difference to (1), however, is small. The Bayesian information international expansion has overstretched, and unforeseen costs such as
criterion (BIC) prefers model (1) over model (2), and model (4) over a loss of flexibility and lower product quality occur.

9
B. Dachs, et al.
Another explaining factor for backshoring is the technological in-
tensity of the industry; complex systems producers might be more re-
ceptive to adopting advanced manufacturing technologies such as
Industry 4.0 (Lasi, Fettke, Kemper, Feld, & Hoffmann, 2014). Compa-
nies in a technology-intense environment usually also possess a higher
asset specificity (Foerstl et al., 2016). This makes cross-border co-
ordination more complex and may favor local integration and back-
shoring over global value chains and offshoring strategies. Specificity –
besides the coupling of a company’s functions (e.g. collocation of pro-
duct development and production) and the formalization of operating
procedures – seems to play a large part in explaining location decisions
in favor of high-wage countries (Ketokivi, Turkulainen, Seppälä,
Rouvinen, & Ali-Yrkkö, 2017).
The analysis also highlighted the position of the firm in the value
chain as a determinant for backshoring. For suppliers, being present in
proximity to foreign customers is essential; manufacturers of final
products can also supply foreign markets by exports. Many suppliers
have offshored production to serve their key clients all over the world,
so in the case of suppliers, the argument of proximity to customers
works in favour of staying offshore. These customer relations seem to
provide an effective ‘glue’ to keep manufacturing activities at foreign
locations, even if external factors like wages or costs of material change.
The ownership of foreign production activities is also positively
associated with backshoring. Companies with own production experi-
ence abroad can better assess the advantages, but also the possible
disadvantages of various location options. They are therefore more
aware of and possibly also more willing to make use of backshoring
options in response to changing technical and economic conditions than
companies that only procure inputs from abroad.
The size of the firm, in contrast, has no significant association with
backshoring propensity in the regression. Larger firms usually do have
more production locations abroad and are stronger integrated in global
value chains, leading to more opportunities to backshore than in
smaller companies. In contrast, smaller companies do not have the
necessary tools, experiences, management and financial resources to
evaluate offshoring decisions as professionally as large multinationals
(Hollenstein, 2005; Kinkel, Lay, & Maloca, 2007), making their off-
shoring decisions more error-prone and consequently leading to a
higher share of backshoring decisions. These opposing effects seem to
outweigh each other at least partially. Part of the correlation between
backshoring and firm size might also be absorbed by the i4index vari-
able, which increases with firm size just like backshoring.
Product and complexity and batch size are not relevant for the
propensity for backshoring, either. This is surprising, given that back-
shoring increases the flexibility of production processes in the firm, and
flexibility is an important advantage for producers of single pieces or
small batches which produce on demand. The production of complex
products often requires many interactions with suppliers, which are
also facilitated by flexibility.
7. Conclusions
7.1. Relevance for IB theory
The paper holds two interesting results for IB theory. First, we show
that new technologies not necessarily foster globalisation but may also
lead to a re-concentration of production activities. This is a new ob-
servation – given the tendency of ICTs to lower internal coordination
costs and extend the boundaries of firms – which so far found only little
recognition in the IB literature (exceptions are cited in Section 1). There
are indeed signs that the growth of global value chains stagnates:
Timmer, Los, Stehrer, and De Vries (2016), for example, find that the
fragmentation of international production has stalled since 2011. From
today’s perspective, however, it is too early to say that I4.0 can lead to
de-globalisation. Backshoring is still confined to a small group of
manufacturing firms, and fewer companies are performing backshoring
10
Journal of World Business 54 (2019) 101017
than offshoring. Thus, compared to policy-driven de-globalisation –
examples are the Brexit and “US First” industrial and trade policies –
technology-driven de-globalisation from backshoring seems to play
only a minor role so far.
Second, the relevant reasons for backshoring reported by existing
research (chapter 2.1) and our descriptive results (chapter 5.1) indicate
that backshoring can be explained within the existing theoretical fra-
mework of IB theory. This paper for the first time assigns all the re-
levant motives for backshoring decisions mentioned in the literature
systematically to the OLI advantages of Dunning’s eclectic theory
(chapter 2.1). In addition, this paper provides a first assessment which
of the driving factors for backshoring decisions can be influenced in
what way by the use of I4.0 technologies (cf. Table 1). Thus, we provide
a framework for assessing the future potential of I4.0 technologies to
improve specific OLI advantages and support further offshoring and FDI
decisions, but also to create additional advantages at the home base to
support backshoring decisions. By doing so, we extend Dunning’s
thoughts on foreign divestment decisions (Dunning, 1988, pp. 21-23)
with a specific lens on backshoring activities and the influence of new
I4.0 technologies on the determining OLI advantages.
7.2. Implications for policy
The introduction of I4.0 technologies in manufacturing in Western
Europe and North America may increase the attractiveness of these
countries as locations for manufacturing of customized products, as
companies benefit from the geographical proximity to individual cus-
tomers – in the market and for the market (Brennan et al., 2015) –
without suffering from significantly higher manufacturing cost. Local
value chains (LVCs) where firms benefit from the proximity to customers
with diversified demands and needs would thus be increasingly com-
peting with the – so far – dominating global value chains and their
inherent characteristic of separating production from consumption. One
indicator for the relevance of local demand could be the export in-
tensity of the surveyed companies, which is not significantly higher for
backshoring companies in all calculated models and is well below 50%
for all companies in the sample. Such local manufacturing to meet local
demand may be an appropriate strategy not only in major industrialised
countries, but also in some emerging economies. The location of pro-
duction will tend to be closer to consumers and not necessarily in
countries with low wages, reducing the global distance between pro-
duction and consumption in the resulting value chains. The further
adoption of I4.0 including Additive Manufacturing seems to pull in the
direction of more local value chains, allowing fruitful co-location of
production and consumption (Laplume et al., 2016).
More local value chains are also desirable from an ecological point
of view; they might also be good news for employment policy in de-
veloped countries. The political debate is currently dominated by fears
of a large decrease in employment due to the further adoption of ICTs
and new (computerized, smart, intelligent) industrial process technol-
ogies (Arntz, Terry, & Zierahn, 2016; Frey & Osborne, 2017). Our re-
sults show that Industry 4.0 may also trigger developments against this
trend, although it is not possible to give an estimation of the employ-
ment effect of these relocations. However, we should not expect huge
increases in manufacturing jobs. Due to automation, the number of jobs
returning directly will be less than the number originally offshored, and
the new jobs due to backshoring will be rather high-skilled; it is un-
likely that low-skilled jobs will ever return. However, the indirect job
effects created by backshored production capacity at local suppliers,
equipment and service providers might be more relevant.
7.3. Managerial relevance
The paper shows that companies can facilitate the backshoring of
manufacturing activities to their home country by the adoption of I4.0
technologies. Firms can make use of the potentials of I4.0 technologies
B. Dachs, et al.
at their home location to improve (a) productivity or (b) flexibility and
ability for customized production or also (c) product quality as a key
success factor for their competitive advantage (e.g. Ancarani et al.,
2019). This enables companies to find suitable answers to the main
reasons for backshoring, which are, mirroring these I 4.0 potentials, (b)
losses in flexibility, (c) quality issues, and (a) underutilized capacities.
The adoption of Industry 4.0 practices is not the only factor which
may increase the attractiveness of backshoring for manufacturing
companies in the future. Wages in some offshoring locations are
growing fast, which makes labour arbitrage a less promising strategy
(Foresight UK, 2013; Forfas, 2013; Kinkel, 2012; Kinkel et al., 2016). In
addition, the share of labour costs on total production costs is de-
creasing in many manufacturing firms, due to efficiency improvements
from automation and new organisation concepts. Direct labour cost
today accounts for only around 10 per cent or less of production output
value in German manufacturing (Statistisches Bundesamt, 2014).
However, it is not easy for manufacturing companies to restore the
necessary product and process competences they outsourced some years
ago (Pisano & Shih, 2009). In many cases it might be easier to build up
capabilities for the next generation of products or technologies, e.g. in
the new and vibrant area of I4.0 technologies, as re-learning of once
outsourced competences can be a difficult process and provides only
catching-up instead of leading positions (Kinkel, 2014).
7.4. Limitations and future research
An important limitation of this paper relates to the geographical
focus of the company. The advantages of producing in close proximity
to the customer, of course, do not favour backshoring if the customer is
not located in the home country or region of the company, in our case
Central and Western Europe. Offshoring is indeed not only a reaction to
cost pressures, but also a step to enter new markets and being closer to
the customers in foreign countries. So, the argument developed above is
only valid if foreign production serves domestic or European markets.
This is not the case for many suppliers which have followed their in-
dustrial customers to locations abroad or are serving their foreign
customers with production abroad. For them, the argument of closeness
to customers works in favour of staying offshore and was already an
Annex 1: Question on backshoring in the EMS questionnaire 2015
Annex 2: Descriptive statistics for the dependent and independent variables
Variable Obs Mean
back 1705 .0422287
emp 1705 266.1178
i4index 1705 1.939672
exp 1,668 42.28297
aprod 1705 .2340176
reg_fp 1705 .0516129
reg_cs 1705 .0322581
reg_sb 1705 .1671554
reg_pe 1705 .4604106
supp 1,690 .3331361
11
Journal of World Business 54 (2019) 101017
essential motive for their previous offshoring decision, as the results in
this paper have also conclusively shown.
Moreover, our results indicate no causal relationship between the
use of I4.0 technologies and backshoring. It may be that both trends are
driven by a third factor, the need for more flexibility, which can be
achieved by a re-concentration of production activities via backshoring
as well as by investments in Industry 4.0. In some cases, it may be
possible that investments in Industry 4.0 took place at the same time
than backshoring. The causality of the relationship will be addressed by
future research. Future research may also yield more insights by ex-
amining the role of productivity growth in the home country as an
incentive for backshoring in more detail.
Another promising topic of future research is the analysis of back-
shoring strategies in dependence of the motives of the previous off-
shoring decision (Gray et al., 2013). One can argue that the backshoring
of offshored activities that were predominantly targeted towards labor
cost reductions in low-wage countries may show different patterns and
timing than offshoring decisions for market entry or proximity to cus-
tomers. The first type might be much more prone to changes in location
factors such as rising wages, whereas the latter might display a higher
stamina due to the ‘glue’ of customer relations and downstream LVCs in
the foreign market. Therefore, motives of the previous offshoring de-
cision need to be integrated in future frameworks explaining back-
shoring activities.
Acknowledgements
The authors thank the participants of the 44th AIB (UK&I) & 6th
Reading IB Conference 2017, Reading, UK, the participants of the 2017
DRUID conference, New York, the participants of the 2017 EUROMA
conference, Edinburgh, and the participants of the 2017 CONCORDi
conference, Seville, for their comments. Financial support by the
Austrian Federal Ministry of Transport, Technology and Innovation for
the project “Rückverlagerungen und Industrie 4.0″ and by MAKERS, a
Research and Innovation Staff Exchange project funded under the EU
Research and Innovation programme Horizon 2020 as Marie
Sklodowska-Curie Action, is gratefully acknowledged.
Std. Dev. Min Max
.2011696 0 1
2593.2 20 99999
1.095962 .8175 5.631008
32.62937 0 100
.4235074 0 1
.2213091 0 1
.1767365 0 1
.373224 0 1
.4985764 0 1
.4714743 0 1
B. Dachs, et al. Journal of World Business 54 (2019) 101017

batch 1,688 .2399289 .4271664 0 1

complex 1,682 .3168847 .4654004 0 1

Source: EMS 2015

Annex 3: Frequency of the adaption of Industry 4.0 technologies for all firms in the sample and broken down to different industrial
regimes

Total Technological regime

CP FP CS SB PE

Additive Manufacturing (prototype + production) 14% 10% 9% 35% 26% 20%

Near real-time production control systems 30% 35% 35% 24% 28% 28%
Digital Exchange of data with suppliers / customers 34% 32% 32% 56% 30% 35%
Systems for automation of internal logistics 32% 32% 31% 45% 38% 30%
Product-Lifecycle-Management Systems 14% 9% 14% 24% 21% 15%
Technologies for safe human-machine interaction 5% 4% 3% 13% 6% 5%
Digital Visualisation 31% 24% 24% 27% 40% 33%

Source: EMS 2015

Annex 4: Correlation table

back emp i4index exp aprod reg_fp reg_cs reg_sb reg_pe supp batch complex

back 1.00
emp 0.02 1.00
i4index 0.10 0.05 1.00
exp 0.11 0.07 0.14 1.00
aprod 0.18 0.11 0.21 0.31 1.00
reg_fp 0.03 −0.01 −0.04 0.10 0.09 1.00
reg_cs 0.05 0.14 0.08 −0.03 0.08 −0.04 1.00
reg_sb 0.06 0.03 0.06 0.17 0.07 −0.10 −0.08 1.00
reg_pe −0.02 −0.04 0.01 0.06 0.01 −0.21 −0.17 −0.42 1.00
supp −0.06 −0.02 0.10 0.05 0.05 −0.08 0.04 0.07 0.06 1.00
batch −0.05 −0.03 −0.13 −0.10 −0.10 −0.06 0.00 −0.12 0.16 −0.11 1.00
complex 0.00 0.05 0.09 0.19 0.07 −0.08 0.01 0.13 0.12 0.01 0.16 1.00

Annex 5: Variance inflation factors

VIFs for Model 1

Variable VIF 1/VIF

exp 3.30 0.302754

i4index 3.06 0.326366
reg_pe 2.21 0.452388
reg_sb 1.59 0.629438
ch 1.56 0.641127
supp 1.52 0.658660
aprod 1.51 0.663571
at 1.25 0.802233
reg_fp 1.16 0.863195
reg_cs 1.13 0.887300
emp 1.05 0.954318
Mean VIF 1.76

Source: EMS 2015, own calculations

VIFs for Model 2

Variable VIF 1/VIF

exp 3.38 0.295681

i4index 3.12 0.321007
reg_pe 2.47 0.404940
complex 1.65 0.604921
reg_sb 1.65 0.607545

12
B. Dachs, et al. Journal of World Business 54 (2019) 101017

ch 1.56 0.640484
supp 1.52 0.656018
aprod 1.51 0.660292
batch 1.36 0.732819
at 1.25 0.799447
reg_fp 1.16 0.860294
reg_cs 1.14 0.878845
emp 1.05 0.952742
Mean VIF 1.76

Source: EMS 2015, own calculations

VIFs for Model 3

Variable VIF 1/VIF

exp 3.29 0.303759

i4index 3.06 0.326594
reg_pe 2.21 0.452527
reg_sb 1.59 0.629545
ch 1.56 0.642427
supp 1.52 0.659587
aprod 1.50 0.667194
at 1.25 0.803174
reg_fp 1.16 0.863736
reg_cs 1.11 0.901628
Mean VIF 1.82

Source: EMS 2015, own calculations

VIFs for Model 4

Variable VIF 1/VIF

exp 3.12 0.320063

reg_pe 1.93 0.518172
ch 1.52 0.659254
reg_sb 1.50 0.664931
aprod 1.47 0.678421
supp 1.46 0.687129
at 1.23 0.816213
reg_fp 1.14 0.875494
reg_cs 1.08 0.922176
emp 1.05 0.954986
Mean VIF 1.55

Source: EMS 2015, own calculations

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