Should multinational firms implement blockchain to provide quality verification?

https://doi.org/10.1016/j.tre.2020.102121Get rights and content

Highlights

  • E-tailers selling global brand products always benefit from blockchain as quality verification.

  • Blockchain will increase the MNF’s wholesaling profit, but reduces the benefits from retailing and tax-planning.

  • MNF’s participation decisions are influenced by competition and tax disparity between tax jurisdictions.

  • Tariff and blockchain cost hinder the MNF from participating in blockchain.

Abstract

The e-tailers selling global brands’ products on cross-border e-commerce platforms have been suffering from low-quality image. To solve this problem, some platforms (e.g., eBay, Lazada, and Tmall Global) have utilized blockchain for quality verification that creates customers’ trust and guarantees the products’ quality. It is widely acknowledged that the operations of blockchain require all supply chain parties’ participation. Therefore, whether the owners of the global brands have incentives to verify the quality and origin of the goods via blockchain can be critical, especially when the brand-owners are multinational firms (MNFs) owning retail divisions in the same market. In this paper, we study a co-opetitive supply chain consisting of an MNF located in high tax country/region and an e-tailer sourcing from the MNF and reselling the goods. The e-tailer competes with the MNF’s retail division in a low-tax country/region. We find that, blockchain is a double-edged sword for the MNF. It increases the MNF’s wholesaling profit, but reduces the MNF’s retailing profit and tax-planning benefit. Consequently, the MNF will not participate in blockchain if the tax disparity is large and the downstream competition is fierce.

Introduction

The online sales volume is predicted to reach $6.54 trillion in 2022, making cross-border e-commerce market more and more important in the world, especially for the global brand-owners targeting at the customers that purchase products globally (McKinsey & Company, 2019, Statista, 2019). To better meet the demand, many e-tailers are observed to purchase the products of global brands and resell them on the platforms such as eBay, Lazada, Paytm Mall, and Tmall Global. Typical example is LiLe (HongKong) E-commerce Limited, which became the official authorized e-tailer of a2Milk by opening its flagship store on Tmall Global and Lazada.

However, the products of global brands sold on cross-border e-commerce platforms have been suffering from low-quality image and suspicion of customers (Forbes, 2017, Wang et al., 2020). Two reasons account for this: (1) Cross-border e-commerce platforms (e.g., eBay, Lazada, Paytm Mall, and Tmall Global) have been reported to be lax in online market supervision, which significantly damages their brand reputation and quality image of the products sold on the platforms (CNN, 2015, CNBC, 2016); (2) Customers hold suspicious belief about the e-tailers’ product quality, because the information about the products’ origin is often missing. In reality, even the e-tailers are officially certificated to sell the MNF’s products, customers still doubt the authenticity of the products (China Intellectual Property, 2012, Montecchi et al., 2019).

To tackle the aforementioned problems, blockchain has been recently developed. Essentially, blockchain is a distributed and secure ledger that stores various information/data in a peer-to-peer network (Wang et al., 2019, Olsen and Tomlin, 2020). In a multi-tier supply chain, blockchain could integrate all the information/data from different supply chain entities, including production, logistics, inspection, and sales, etc. The information/data is secure because it cannot be modified unilaterally once added in blockchain, which is accessible to all the supply chain entities, from the upstream to the downstream (Tang and Veelenturf, 2019). Given that the product information (such as the product origin) is integrated in blockchain, customers have the access to all the verified information (Choi, 2019). In this sense, the MNF’s participation in blockchain improves the customers’ quality image and removes their belief uncertainty. It is reported that eBay, Lazada, and Tmall Global have already utilized blockchain for high-end products like diamond jewelry and luxury handbags (Dapp Life, 2019, Krish Compusoft Services, 2019), through which the product information will be automatically delivered to the customers (accessible on the customers’ smartphones).

The utilization of blockchain guarantees the high-quality image of the products sold by the e-tailers (Choi, 2019). However, Gartner 2018 CIO Agenda Survey showed that, only 3.3% of the firms had actually deployed blockchain in their operations (Mearian, 2019). One major reason is the huge adoption cost. For example, in diamond industry, developing blockchain requires the firms to purchase laser machine to establish the digital thumb-print & authentication certification, which is costly. On the other hand, the global brands are usually MNFs, who have established their retail divisions. For example, Louis Vuitton’s first Maison flagship store opened in 2012 (Retail in Asia, 2012). Clearly, the MNFs’ retail divisions act as the direct competitors of the e-tailers. Once the MNFs participate in blockchain, the retail divisions will face intensified market competition, because the e-tailers’ products obtain the same high-quality image, although there are still channel differences due to non-identical services and channel images. Therefore, whether to participate in blockchain has become a strategic decision for the MNFs. Based on the discussions above, our first research question naturally arises: Should the MNF participate in blockchain for quality verification, which can guarantee the high-quality image of the products sold by the e-tailers?

There are two important types of tax in the MNF’s global operations: corporate income tax and tariff (Hsu and Zhu, 2011, Shunko et al., 2014, Shunko et al., 2017). Regarding the corporate income tax, most MNFs are headquartered in the countries/regions with high corporate income tax. For example, Coach is headquartered in U.S. with the corporate income tax rate 35%. Louis Vuitton (LV) and Hermes are headquartered in France with the corporate income tax rate 31%. When establishing a retail division in a foreign country/region, the MNF’s overall after tax profit is:1-x1profitofthebranddivision+1-x2profitoftheretaildivision,where x1=35% if the MNF is Coach from U.S., and x2=24% if Coach’s retail division is in Malaysia (Shunko et al., 2017). The MNF sells products at a unit transfer price, wherein the pricing incentives might be influenced by the tax disparity between two tax jurisdictions. For example, Coach has the incentives to lower the U.S. division’s pre-tax profit and increase the Malaysia retail division’s pre-tax profit. To monitor MNF’s tax-planning behavior via transfer price, the Arm’s Length Principle (ALP) is widely adopted (Shunko et al., 2014, Shunko et al., 2017). According to ALP, the transfer price for the MNF’s retail division should be equal to the wholesale price for the local rival (Hsu et al., 2019b), which has been proven to be successful in constraining the MNFs’ tax-planning benefits.

The MNF can improve its wholesaling profit from the e-tailers by increasing the wholesale price when blockchain improves the e-tailers’ quality image. While, according to the ALP rule, the transfer price for its retail division is also increased, which may reduce the tax-planning benefit. Thus, although the participation in blockchain may improve the MNF’s wholesaling profit from the e-tailer, the ALP rule limits the MNF’s tax-planning benefit, and hence, influences the MNF’s motivation to participate in blockchain. Being aware of this, our second research question naturally arises: What are the impacts of tax disparity and ALP rule on the MNF’s incentives of participating in blockchain?

The other important tax is tariff, which plays a similar role to unit cost for both the MNF’s retail division and the e-tailer, because the tariff is levied on B2B transactions among the MNF, the retail division, and the e-tailer. We study the impact of tariff in Extension 5.3.

We build a co-opetition model considering an MNF consisting of a manufacturing division and a retail division, and an e-tailer operating on a cross-border e-commerce platform. The e-tailer and the MNF’s retail division are competitors in a low-tax market. The MNF sells products to its retail division at a unit transfer price which is equal to the wholesale price for the e-tailer. Admittedly, the exchange rate between the MNF’s manufacturing division and the retail division (also between the MNF and the e-tailer if they are in different countries) could be volatile and uncertain. However, such an uncertainty could be offset when the transactions are settled using the same currency such as dollars. In order to focus on the impact of tax on the MNF’s strategic blockchain participation decision, we do not incorporate exchange rate uncertainty in this study (similar setting is adopted by literature such as Shunko et al., 2014, Shunko et al., 2017). The e-tailer suffers from poor quality image which can be improved by the MNF’s participation in blockchain. If the MNF decides not to participate in blockchain, the products sold by the MNF’s retail division have superior quality image to the e-tailer, which provides channel advantage for the MNF. If the MNF decides to participate in blockchain, the retail division’s quality image advantage is removed. We consider two scenarios: (1) With the MNF’s participation (Scenario P); (2) without the MNF’s participation (Scenario N). Our main findings are summarized below:

First, the MNF’s participation in blockchain will increase the wholesale price (transfer price) and benefits the e-tailer. Possible reasons are as follows. On the one hand, the MNF’s participation in blockchain improves the e-tailer’s quality image, which increases the e-tailer’s market potential, order/sales quantity, and retail price. On the other hand, the e-tailer’s increased order/sales quantity enables the MNF to raise the wholesale price, which increases the MNF’s wholesaling profit. Based on these two forces, the e-tailer’s overall profit can change in two directions: If it is benefited more from the increased retail price and sales quantity, the e-tailer enjoys a profit growth. Otherwise, the e-tailer’s profit will be hurt. In equilibrium, we show that the increased retail price and sales quantity weigh more. We find that, the MNF’s retail division’s profit is always hurt by the increased transfer price, which uncovers the important tradeoffs of participating in blockchain for the MNF: Although its wholesaling profit will increase, it is at the cost of the retailing profit loss.

Besides the tradeoffs above, the MNF has other considerations in its participation decisions. We show that, the interactions between tax-planning and competition largely determine the MNF’s participation incentives. The increased wholesale price forces the MNF to raise the transfer price because of the ALP rule, making the MNF keep more pre-tax profits in upstream manufacturing division with high corporate income tax. When the e-tailer’s initial market potential is low, the MNF’s participation in blockchain significantly stimulates the e-tailer’s order/sales quantity, increasing the MNF’s wholesaling profit rapidly. At the same time, the profits from retailing and tax-planning also decrease significantly given the increased wholesale/transfer price. However, when the e-tailer’s initial market potential is high, the results are totally reversed: Both the increased wholesaling profit and the decreased retailing and tax-planning profits are low. As a result, the MNF’s participation incentives are lowered when the e-tailer’s initial market potential is low or high. Interestingly, we find that, the increased wholesaling profit dominates the profit loss of retailing and tax-planning when the e-tailer’s initial market potential is intermediate. The MNF is therefore incentivized to participate in blockchain. We also show that, if the competition between the MNF’s retail division and the e-tailer is intensified, the MNF’s retailing profit will be further hurt, especially when the tax disparity is large.

We further study the impact of tariff. Interestingly, the MNF’s tax-planning profit will increase as tariff increases. The reason is that, “tariff + transfer price” acts as the retail division’s total procurement cost. Given a high tariff, the MNF is incentivized to lower the transfer price, resulting in an increased tax-planning benefit. This also benefits the e-tailer, and the overall supply chain system because of the weakened double marginalization effect (a low wholesale price/transfer price indicates low double marginalization effect). However, the tariff will hinder the MNF from participating in blockchain.

This work makes theoretical and practical contributions in the following aspects. First, motivated by important industrial observations, we examine the interactions among competition, tax disparity, and the MNF’s incentives to participate in blockchain. As previous literature concentrates on the conceptualization and future research discussions about blockchain, we investigate an MNF’s strategic decision to participate in blockchain. Second, we identify the threshold-conditions where the MNF is better off or worse off by participating in blockchain. Such results can be very insightful when the MNF strategically decides whether or not to participate in blockchain, because many firms are exploring ways of utilizing blockchain to create value in the industry 4.0 era (Tang and Veelenturf, 2019). Third, cross-border operations nowadays arise as critical driving forces for economic growth, and MNF’s utilization of tax disparity plays an important role. This work sheds light on an MNF’s optimal decisions when tax disparity, local competition, and demand expansion are considered, based on which the MNF can balance the tradeoffs among wholesaling, retailing, and tax-planning profit gains.

Specifically, we investigate whether the MNF should participate in blockchain to help verify the e-tailer’s product quality when they are engaging in a co-opetition relationship. Our work follows the recent studies on the adoption and implication of blockchain, such as Wang et al., 2019, Tang and Veelenturf, 2019, and Choi (2019). We examine how the MNF’s preferences of blockchain hinge on channel competition and tax disparity. Despite that these factors are typical in the MNF’s cross-border transactions, previous literature rarely explores their interactive effects, especially when the MNF’s strategic decision of participation in blockchain is considered. Our contribution is to show that, even considering the competition with the downstream e-tailer, the MNF still has incentives to participate in blockchain to improve the e-tailer’s quality image. Choi (2019) points out that investigating the MNF’s preferences of participation in blockchain under competition could be “interesting” and “strategic”. Therefore, our result extends previous literature on blockchain by considering the downstream e-tailer’s competition and the MNF’s cross-border tax-planning.

The rest of this paper is organized as follows. We review the related literature in Section 2. In Section 3, we describe the model settings, notations, and present the equilibrium outcomes. We analyze the wholesale price, the sales/order quantities, prices, and the MNF’s participation decisions in Section 4. Section 5 provides extensions concerning the tariff and unit blockchain cost. Conclusion and future research directions can be found in Section 6. All the proofs are in the Appendix.

Section snippets

Literature review

This paper investigates the impacts of blockchain acting as quality guarantee in a global supply chain with the consideration of tax. Therefore, studies on (1) quality management and guarantee, (2) global supply chain management with tax consideration, and (3) blockchain technology in supply chain management are closely related.

Model

We consider an MNF (denoted by F) consisting of a manufacturing division (denoted by M) and a retail division (denoted by R). The MNF sells products in an oversea market through its retail division and a third-party e-tailer (denoted by E). The MNF is headquartered in a high tax country/region (e.g., U.S.) with the tax rate rH, while its retail division and the e-tailer are located in a low tax country/region with the tax rate rL (e.g., Malaysia), where rL<rH (see Fig. 1). Without loss of

Analysis

Lemma 1

The equilibrium outcomes satisfy:

  • (1)

    The equilibrium wholesale/transfer price in Scenario P is higher than that in Scenario N, i.e., wP-wN>0;

  • (2)

    The equilibrium retail prices of the e-tailer and MNF’s retail division in Scenario P are higher than that in Scenario N, i.e., pEP-pEN>0, and pRP-pRN>0;

  • (3)

    The order quantity of the e-tailer in Scenario P is higher than that in Scenario N, while the order quantity of the MNF’s retail division in Scenario P is smaller than that in Scenario N, i.e., qEP-qEN>0, and q

Unit blockchain cost

In the basic model, we incorporate a fixed cost F when the MNF participates in blockchain. In practice, the MNF may also incur unit cost for creating the authentication information. For example, in diamond industry, each data record will cost $50 for registration (Choi, 2019). We therefore investigate the impact of unit cost c on the MNF’s participation decisions. We denote this case as Scenario P1. The MNF’s profit function is:πF=w-cqE1-τ+wqR1-τ+pR-wqR-F

We compare the equilibrium outcomes and

Conclusion

In a global market, customers usually have limited information of the online products. To help with the e-tailers’ operations, the online platforms have developed blockchain as quality guarantee. Clearly, blockchain can only work with the brand-owners’ participation. Otherwise, the blockchain lacks the information of the products to be engaged in quality verification. We note that the brand-owners are usually MNFs who have retail divisions, which makes their incentives to participate in

CRediT authorship contribution statement

Baozhuang Niu: Conceptualization, Formal analysis, Resources, Writing - review & editing, Supervision, Funding acquisition. Zihao Mu: Investigation, Writing - original draft, Visualization, Writing - review & editing. Bin Cao: Conceptualization, Methodology, Writing - original draft, Writing - review & editing, Supervision, Project administration. Jie Gao: Validation, Writing - review & editing, Funding acquisition.

Acknowledgements

The authors are grateful to the editor and reviewers for their helpful comments. This work was supported by NSFC Excellent Young Scientists Fund (No. 71822202), Chang Jiang Scholars Program (Baozhuang Niu 2017), National Natural Science Foundation of China (No. 71971166), the Fundamental Research Funds for the Central Universities, and Hong Kong Polytechnic University, China (Project No. SB2W). The corresponding author is Bin Cao.

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