Propagation of Shocks in The Competitive Environment Along The Supply Chain

Description

Over the last few decades, globalization has been an economic force in importation that firms cannot avoid. In particular, it has significantly increased competitive pressure by facilitating the penetration of foreign rivals into local markets. While many studies have investigated the effect of import penetration on domestic performance, only recently has its effect on the corporate policies of domestic firms received attention from researchers. However, to fully understand the effect of import penetration on the domestic economy, firms linked economically to those firms that are directly affected should also be considered.This project aims to investigate how a negative shock to a customer’s competitive environment, represented by an increase in import penetration, affects supplier firms, specifically their performance and leverage choices. While several recent studies have established the interdependence between customer and supplier, it not evident how an exogenous shock to a customer’s competitive environment propagates along the supply chain, as a customer would optimally choose whether to transfer the negative shock to its suppliers. Existing studies do not clearly predict whether suppliers would be negatively affected by intensified competition in their customers’ industry, even if customers choose to transfer the negative shock to their performance. Additionally, this project will address a related research question: whether the influence of customer shock varies in magnitude according to the nature of the customer-supplier relationship and the supplier’s market structure. Both the intensity of customer-supplier relations and supplier market structure determine the bargaining power of a customer over its suppliers. At the same time, the importance of a particular supplier-customer relationship to a customer would affect how much the customer cares about the particular supplier. Both the customer’s bargaining power and the customer’s concern for the supplier should affect the magnitude of the customer shock effect on suppliers.