Political Relations and Global Supply Chains

Description

The rising political uncertainty, such as the US-CN trade war, imposes enormous challenges for multinational companies (MNC) to manage their global supply chains (GSC). Firms must adjust their supply chain networks by considering the political risks. The restructuring of the global supply chain would have a profound and extensive impact on the worldwide economy. Therefore, understanding how firms adjust their supply chains in response to political risks and the consequence is crucial, urgent, and timely. This research is of great importance to scholars, business leaders, and policymakers.We compile a unique and comprehensive dataset containing rich details of firm-level internationalization activities for all public-listed firms worldwide. This dataset allows us to quantify the degree of firm internationalization from the following aspects:1. Supplier-customer partnership2. Organizational structure network3. Geographically decomposed revenue.We then examine how political risk shape GSV. Besides commonly-used political uncertainty proxies such as the EPU index, we consider the bilateral political relationships, such as the US-China relationship, which have not yet been explored in the GSV literature but are critically important. We examine the following questions:1. Do MNCs redeploy their foreign operations back to their home countries when facing increasing overseas political risk?2. How do political risks in the foreign country and the bilateral conflicts between home and foreign countries affect the location of suppliers and subsidiaries?3. Whether the MNCs' retreat in a country affects the aggregated industry-level production and employment of that country?The connection between the global supply chain and political risk has been widely discussed in newspaper articles and research reports issued by government agencies and consulting firms. However, academic research with solid empirical analysis is rare. A recent paper by Charoenwong, Han, and Wu (2020) is the first one to provide empirical evidence on this topic. Our paper extends Charoenwong et al. (2020) in the sense that:1. We use an international sample of firms, whereas they study U.S. firms only.2. We consider the bilateral country political relationships while they focus on unilateral political uncertainty.3. Our unique data allow us to study both inter-firm relationships (i.e., the suppliercustomer partnership) and intra-firm relationships (i.e., organizational structure).4. We additionally study the consequence of global supply chain adjustment on the local economy. This question is critically important for emerging countries, such as China, which rely on foreign investments to promote economic growth in past decades.