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Trade and Foreign Economic Policy Uncertainty in Supply Chain Networks: Who Comes Home?
Abstract
Problem definition: The uncertainty around trade and foreign economic policy contributes to supply chain risk. Academic/practical relevance: Whether such policy uncertainty will bring some production back to the United States or only redistribute the global supply chains among foreign sources is theoretically ambiguous and warrants an empirical analysis. In this paper, we study the relationship between trade and foreign economic policy uncertainty and the supply chain networks of American firms. Methodology: We use firm-level global supply chain data, transaction-level shipping container data, and policy uncertainty indexes constructed from leading media outlets to study how policy uncertainty correlates with changes in supply chain networks. Results: When U.S. trade policy uncertainty rises, firms with majority domestic sales decrease their supplier base abroad, whereas firms with majority foreign sales increase the number of foreign suppliers. Firms also substitute among foreign countries in response to their respective economic policy uncertainty—shifting suppliers from countries with higher uncertainty to ones with lower uncertainty. Firms requiring more specific inputs, producing more differentiated products, having higher market shares, and more central to the production network are more sensitive to policy uncertainty. Managerial implications: Supply chain restructuring following higher policy uncertainty puts the market value at risk. Managers should consider customers’ locations when making global supply chain restructuring decisions.
Funding: B. Charoenwong acknowledges funding from the National University of Singapore [Start-Up Grant R-315-000-119-133] and the Singapore Ministry of Education [AcRF (Academic Research Fund) Tier 1 Grant R-315-000-122-115]. J. Wu acknowledges funding from the Hong Kong RGC (Research Grants Council) [Grant 14504621].
Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.1136 .
... Research on the impact of foreign EPU on the domestic economy is scarce but it is accelerating. Uncertainty regarding foreign economic policy can affect macroeconomic operations (Cheng, 2017), supply chain risks (Charoenwong et al., 2022), firm entry and exit (Feng et al., 2017), exports (Greenland et al., 2019), and employment (Fontaine et al., 2017). Global value chains are the essential indicators of economic performance and the crucial means of achieving high-quality economic growth. ...
Economic globalization in the 21st century has been characterized by the rise and spread of global value chains (GVCs). It faces significant challenges due to increasing domestic and international policy uncertainty in the context of emerging mega risks like geopolitical tensions and climate change. This paper begins by constructing a theoretical model for an open economy to study how risk‐averse firms make decisions regarding the sourcing of intermediate inputs in an uncertain environment. Our model solution proposes that firms will source fewer intermediate inputs from countries with more economic uncertainty. An increase in domestic and foreign uncertainty will have opposite impacts on a country's position in GVCs. In this sense, we argue that a country tends to move downstream along GVCs if its own economic policies become more uncertain, and it tends to move upstream with an increase in the uncertainty of its trading partner countries. Our regression analyses, based on data including the World Input–Output Database, World Development Indicators, the UN Comtrade database, and the Economic Policy Uncertainty Index, provide empirical support for this model‐based conclusion. Our findings highlight that a nation must consider foreign economic policy uncertainty and maintain domestic policy stability to participate in GVCs.
... Additionally, Khoo and Cheung (2021) emphasizes that the increasing level of uncertainty not only impacts the attitudes of market players but also results in a need for greater remuneration, significantly influencing company plans. Numerous academic studies have extensively examined the varied consequences of uncertainty on several aspects of corporate operations, such as investment decisions (Al-Thaqeb and Algharabali 2019; Jackson and Orr 2019; Chu and Fang 2021;Kong et al. 2022), financial decision making (Lee et al. 2017;Tran 2019), market behavior and competition (Shabir et al. 2021;Desalegn et al. 2023), innovation and R&D (Saleem et al. 2018;Xu 2020;He et al. 2020;Cui et al. 2021;Tajaddini and Gholipour 2021), supply chain management (Charoenwong et al. 2023), consumer behavior and demand Kuok et al. 2023), risk management and contingency planning (Hammoudeh and McAleer 2015;Chen et al. 2021), financial performance and reporting (Ozili 2021;Bermpei et al. 2022), mergers and acquisitions (Bonaime et al. 2018;Sha et al. 2020;Paudyal et al. 2021), sustainability and environmental impact (Ahmed et al. 2021;Xue et al. 2022), operational efficiency and cost management (Liu and Wang 2022), and insurance and risk transfer (Gupta et al. 2019), among other areas. ...
This study investigates the association between economic uncertainty and audit quality in the BRICS nations, examining both input-based (e.g., audit fees, auditor tenure) and output-based (e.g., restatements, total accruals) measures of audit quality. Utilizing a dataset of 83,511 firm-year observations from 1995–2022, it reveals a significant negative impact of economic uncertainty on audit quality. Additionally, the research explores the moderating role of CEO power, employing principal component analysis to merge various indicators of CEO influence. Findings indicate that powerful CEOs can mitigate the adverse effects of economic uncertainty on audit quality, suggesting a U-shaped relationship between CEO power and audit quality. Methodologically robust, employing techniques like two-stage least squares (2SLS) and two-stage system generalized method of moments (system GMM) to address endogeneity, the study offers a comprehensive analysis of audit quality in the context of economic fluctuations and corporate governance, contributing significantly to the understanding of these dynamics in emerging economies, particularly in the diverse and influential BRICS nations. This study’s findings have significant implications for stakeholders and policymakers, providing insights that can inform policy decisions and enhance corporate governance frameworks.
... We study inventory productivity through the lens of supply network, which has also been used by Agca et al. (2022), Osadchiy et al. (2021), Wang et al. (2020), Charoenwong et al. (2023) to offer nuanced understanding of credit risk, bullwhip effect, shared supplier risk, and reshoring respectively. ...
Problem definition: We provide a novel, supply network-based perspective on inventory productivity and incentives for its improvement. Methodology/results: Using data from 2003 to 2019, we find that inventory productivity is lower materially and statistically for firms located upstream in the supply network, and higher for high degree and more central firms. Firms with high inventory productivity show high equity valuations and abnormal returns, with both valuations and abnormal returns amplified for upstream, low degree, and peripheral firms. Moreover, the difference in valuations and abnormal returns between best and worst performing firms is greater upstream, suggesting that financial markets offer outsized rewards for improving inventory productivity to upstream firms. Managerial implications: We show that the information about firm’s upstreamness and centrality in the supply network is a valuable predictor of its inventory productivity and financial performance. Our methods for evaluating upstreamness are useful for that purpose. For operations managers and firm executives, our results highlight strong incentives for inventory productivity improvement upstream in the supply network. For investors, we show that supply network position data can sharpen inventory-based arbitrage opportunities.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0229 .
... Future works are expected to overcome these shortcomings using more realistic models and detailed data, such as transaction-level data used in recent studies [71,73]. In addition, while this paper examines industry-specific trade disruption, the simulation of firm-specific trade disruption could consider resilience and vulnerability to trade disruption at the firm level and thus identify critical importer firms in supply chains. ...
This study simulates how the disruption of imports from various regions affects the total production of the importer economy. We particularly incorporate the propagation of the economic effect through domestic supply chains using data on more than one million firms and four million supply chain ties in Japan. Our findings are summarized as follows. First, the negative effect of the disruption of intermediate imports grows exponentially as its duration and strength increase due to downstream propagation. Second, the propagation of the economic effect is substantially affected by the network topology of importers, such as the number of importers (affected nodes) and their degree of upstreamness in supply chains, whereas the effect of their degree centrality is heterogeneous depending on their degree of upstreamness. Finally, the negative effect of import disruption can be mitigated by the reorganization of domestic supply chains, even when conducted only among network neighbors. Our findings provide important policy and managerial implications for the achievement of more robust and resilient global supply chains.
... GSC refers to a form of economic organization in which multinational enterprises participate in the production and delivery process of products or services globally and cooperate. Its characteristics mainly cover division of labor, cross-border cooperation, supply chain integration, and technology and knowledge intensity (Charoenwong et al., 2023). Elements of international trade indicate various factors and factor combinations such as goods and services, labor, capital, technology, and knowledge that participate in international trade activities . ...
This study aims to analyze the application of information security (IS) technology and blockchain in the media economy, and the impact of cross-border cooperation and value chain reconstruction combined with blockchain technology (BCT) on promoting innovation and digital transformation in the media economy. This study delves into the interplay between cross-border collaboration, value chain reconstruction, and BCT. It constructs a media economic digital platform by amalgamating blockchain and cross-border value chain principles, subsequently evaluating and analyzing its performance. Findings indicate that the proposed model exhibits a reduced block propagation time and enhanced security performance, boasting a 5% improvement. The platform’s latency remains stable at approximately 245 ms. Survey analysis reveals an agreement rate exceeding 57.94% across dimensions such as data mining, customer relationship management, and classification effectiveness, contributing to heightened user satisfaction. Consequently, this study offers valuable insights into user relationship security management within cross-border collaborations, shedding light on novel avenues for sustainable development and digital transformation in the realm of the media economy.
... measure cross-border supply chain fragmentation and show the fragmentation of supply chains adds 0.44 points to the global trade elasticity before the 2008 financial crisis, while only 0.05 points after that.Charoenwong et al. (2022) empirically investigate how firms restructure global supply chains under the trade and economic policy uncertainty. They find as the uncertainty of the U.S. trade policy increases, firms with high domestic revenue shares reduce the number of foreign suppliers, whereas firms with a majority of foreign sales increase the number of foreign ...
... US is building domestic production capacity As mentioned above, China is a critical base for procurement, and the US suffered a supply shock of material because the pandemic disrupted product flow from China. The US firms were harmed in various ways: the adverse credit shock was propagated through supply chains [12], the increased policy uncertainty hurt market value [13], and the disruption limited access to cross-border financing [2]. Nonetheless, China's supply chain is highly resilient [14]. ...
We provide evidence that the COVID-19 pandemic has incentivized U.S. firms to rebalance the trade-off between manufacturing cost efficiency and supply chain resilience in their sourcing decisions. Over the past few decades, companies have been outsourcing production to low-cost countries such as China in pursuit of cost-efficiency. However, the risk of supply chain disruptions has been receiving heightened attention recently, as countries strive to prioritize scarce resources for domestic needs during the global pandemic. Our research shows that while China’s supply chain has proved resilient, U.S. companies have increased their access to medical supplies through domestic production. As a result, COVID-19 has highlighted the importance of local capacity and changed the traditional perception of outsourcing from a purely economic efficiency focus to one emphasizing the need to balance risks in global exposures.
... We study inventory productivity through the lens of supply network, which has also been used by Agca et al. (2022), Osadchiy et al. (2021), Wang et al. (2020), Charoenwong et al. (2023) to offer nuanced understanding of credit risk, bullwhip effect, shared supplier risk, and reshoring respectively. ...
We provide a novel, supply network-based perspective on inventory productivity and incentives for its improvement. Using data from 2003 to 2019, we find that inventory productivity is lower materially and statistically for firms located upstream in the supply network, and higher for high degree and more central firms. Firms with high inventory productivity show high equity valuations and abnormal returns, with both valuations and abnormal returns amplified for upstream, low degree, and peripheral firms. Moreover, the difference in valuations and abnormal returns between best and worst performing firms is greater upstream, suggesting that financial markets offer outsized rewards for improving inventory productivity to upstream firms. We show that the information about firm's upstreamness and centrality in the supply network is a valuable predictor of its inventory productivity and financial performance. Our methods for evaluating upstreamness are useful for that purpose. For operations managers and firm executives, our results highlight strong incentives for inventory productivity improvement upstream in the supply network. For investors, we show that supply network position data can sharpen inventory-based arbitrage opportunities.
... More generally, our paper contributes to the literature in various fields emphasizing the importance of global supply chain and export networks (in particular, but not only, Cohen and Mallik 1997;Narasimhan and Kim 2002;Ding et al. 2007;Federgruen and Yang 2009;Hendricks et al. 2009;Charoenwong et al. 2022 Alfaro et al. 2020;Davis et al. 2020;Giglio et al. 2020;Gormsen and Koijen 2020;Ramelli and Wagner 2020;Ding et al. 2021) and credit risk Agca et al. (2022). Additionally, Caligiuri et al. (2020); Brakman et al. (2021); Evenett (2020); Contractor (2021) and many others discuss the structural change in several dimensions of firms' foreign operations, globalization strategies, and their impacts on performance due to COVID-19. ...
This paper shows that the ancestry composition shaped by century-long immigration to the US can explain the current structure of global supply chains. Using an instrumental variable strategy combined with a novel dataset that links firm-to-firm global supply chains with their location information and historical migration data, we find that the co-ethnic networks have a positive causal impact on global supply chain relationships between foreign countries and US counties. The positive impact not only exists in supplier-customer relationships but also extends to strategic partnerships and trade in services. The positive impact is stronger in counties in which a larger number of firms are credit constrained, and such a stronger effect becomes even more pronounced when foreign firms are located in countries with weak contract enforcement. The results suggest that co-ethnic networks serve as social collateral to overcome credit constraints and facilitate global supply chain formation.
... In inventory management, a newsvendor's order quantity depends on the products' forecasted demand (Silver et al. 2016). Similarly, in operations strategy, the decision as to where and when to build capacity requires accurate forecasts of future demand and geopolitical conditions (Charoenwong et al. 2022). Similarly, in long-term humanitarian operations, accurately forecasting demand is key to efficient order planning (Van der Laan et al. 2016). ...
What systems should we use to elicit and aggregate judgmental forecasts? Who should be asked to make such forecasts? We address these questions by assessing two widely-used crowd prediction systems: prediction markets and prediction polls. Our main test compares a prediction market against team-based prediction polls, using data from a large, multi-year forecasting competition. Each of these two systems uses inputs from either a large, sub-elite or a small, elite crowd. We find that small, elite crowds outperform larger ones, whereas the two systems are statistically tied. In addition to this main research question, we examine two complementary questions. First, we compare two market structures, continuous double auction (CDA) markets and logarithmic market scoring rule (LMSR) markets, and find that the LMSR market produces more accurate forecasts than the CDA market, especially on low-activity questions. Second, given the importance of elite forecasters, we compare the talent-spotting properties of the two systems, and find that markets and polls are equally effective at identifying elite forecasters. Overall, the performance benefits of "superforecasting" hold across systems. Managers should move towards identifying and deploying small, select crowds to maximize forecasting performance.
... More generally, our paper contributes to the literature in various fields emphasizing the importance of global supply chain and export networks (in particular, but not only, Cohen and Mallik 1997;Narasimhan and Kim 2002;Ding et al. 2007;Federgruen and Yang 2009;Hendricks et al. 2009;Charoenwong et al. 2022 Alfaro et al. 2020;Davis et al. 2020;Giglio et al. 2020;Gormsen and Koijen 2020;Ramelli and Wagner 2020;Ding et al. 2021), credit risk (Agca et al. 2022), and retail business strategy (Hwang et al. 2020). Additionally, Caligiuri et al. (2020); Brakman et al. ...
We study how a firm's global connectedness through global supply chains and exports affects its stock market performance during crises. While global connectedness can expose firms to negative foreign shocks, it potentially reduces firms' susceptibility to domestic shocks by allowing international diversification. Using weekly global stock market data combined with firm-level supply chain, export, and balance sheet information, we show that, while firms' global supply chain and export networks expose firms to the negative impact of foreign COVID-19 outbreaks, firms with higher global connectedness are also more resilient to domestic COVID-19 exposures in stock markets. Consistent with the international diversification channel, global connectedness alleviates the negative impact of domestic COVID-19 exposures only if connected foreign economies experience a smaller rate of increase in COVID-19 cases than the domestic economy. We investigate various operational outcomes and find that such diversification motive leads firms to reorganize their global supply chain and export structures to mitigate the negative impact of COVID-19 exposures.
Purpose
This paper examines the influence of geopolitical tensions—operationalized as political divergence between governments—on firms’ foreign supply bases and the resulting effects on supply base complexity and sub-tier supplier sharing.
Design/methodology/approach
The authors conduct panel data regression analyses over the period 2003–2019 to investigate whether political divergence affects foreign supply bases for 2,858 US firms sourcing from 99 countries and to examine how political divergence exposure impacts the supply network structures of 853 US firms.
Findings
Firms reduce their supply bases in countries exposed to heightened geopolitical tensions. These supply chain adjustments are associated with increased supply base complexity and greater sub-tier supplier sharing.
Originality/value
This study highlights the importance of state relations in global supply chain reconfiguration. Political divergence between governments provides a dual-view of political risk (i.e. buyer–supplier countries), which can help firms anticipate geopolitical disruptions. While reducing supply bases in foreign countries facing heightened geopolitical tensions is intended to mitigate disruptions, these supply base adjustments are linked to increased supply base complexity and sub-tier supplier sharing, thereby exposing firms to other types of supply disruptions. Additionally, this research contributes to understanding the effects of geopolitical tensions on supply base complexity through the lenses of transaction cost economics and resource dependence theory.
Purpose
Drawing upon the extended resource-based view (ERBV), this research aims to examine the effects of supply chain diversification (SCD) on enterprise digital transformation (DT), focusing on the external perspective of the supply chain.
Design/methodology/approach
Leveraging panel data from Chinese A-share listed companies from 2015 to 2022, this research employs multiple regression analysis to empirically examine the relationship between SCD and enterprise DT.
Findings
The results of analysis indicate that: (1) SCD positively influences enterprise DT, a relationship that persists even after rigorous endogenous and serial robustness testing. (2) SCD fosters enterprise DT by bolstering its absorption, innovation, and adaptive capabilities. (3) Executive risk preferences and Pilot Policies positively mediate the effects of SCD on enterprise DT.
Originality/value
This research provides novel empirical insights into the underlying mechanism linking SCD and enterprise DT. The findings offer valuable guidance for enterprises seeking to optimize supply chain management and embrace DT, while also informing policymakers on strategies to facilitate SCD and DT enhancement among enterprises.
While previous studies primarily use economy-wide indicators for political risk, Hassan et al. (Quart J Econ 134(4):2135–2202, 2019) propose that a significant portion of political risk manifests itself at the individual firm level. We use their measure of political risk to examine whether and how acquirers’ firm-level idiosyncratic political risks affect their mergers and acquisitions (M&A) decisions based on a sample of U.S. firms. We find that firms exposed to a high level of perceived political risk are less likely to conduct M&As. Furthermore, the negative association between firm-level political risk and M&As is more pronounced when acquiring firms lack either financial capacities or non-financial political/social capacities. More importantly, while firms with high political risk generally delay M&As, we find evidence suggesting that acquiring firms may hedge against their firm-level political risk by strategically choosing low-risk M&A targets and conducting vertical integration. Finally, we show that effectively hedged deals exhibit superior post-M&A performance in terms of higher announcement return, lower likelihood of subsequent divestiture and higher post-acquisition change in financial performance.
Globalization has propelled economic development for decades, but this trend seems to be broken, potentially entering a reversal trend of de-globalization, as recent indicators allegedly reveal. Owing to the complexity and novelty of this trend, the literature leads to ambiguous assessments of economic de-globalization and its implications. Therefore, this literature review, drawn from international business literature, attempts to outline the drivers of economic de-globalization and understand how these drivers affect the de-internationalization of cross-border investments by multinational enterprises. Thus, this review provides a terminological basis by distinguishing between de-globalization as an external macro driver and de-internationalization as an internal corporate response. The interdependent de-globalization drivers are social inequality, technological advancement, and environmental sustainability. Additionally, (inter-) national politics play an outstanding role in understanding the development of de-globalization. This study structures the literature on de-globalization and finds that the impact of de-globalization drivers on multinational enterprises varies considerably. As the topic of de-globalization is rather new and conceptually elaborated, many research opportunities exist in this field.
Drawing on real options and resource dependence theories, this study examines how firms adjust their innovation investments to address trade policy effect uncertainty (TPEU), a type of firm‐specific, perceived environmental uncertainty capturing managers' difficulty in predicting the impacts of potential policy changes on business operations. To develop a context‐dependent, time‐varying measure of TPEU, we apply bidirectional encoder representations from transformers, an advanced deep learning technique. We analyze the texts of mandatory management discussion and analysis sections of annual reports from 3181 publicly listed Chinese firms. Our sample comprises 22,669 firm‐year observations spanning the years 2007 to 2019. The econometric analyses show that firms experiencing higher TPEU will reduce innovation investments. This effect is stronger for firms facing lower competition, involving more foreign sales, and not owned by the state. These findings provide clarity on previously inconclusive results by showcasing the significant influence of policy effect uncertainty, as opposed to policy state uncertainty, on firms' decisions regarding innovation investments. Additionally, these findings underscore the importance of resource dependence factors as crucial contextual factors in this decision‐making process.
While global supply chains provide firms with a buffer against local shocks, they expose firms to multi‐regional risks. The COVID‐19 pandemic and its differential impact on different regions in the world offer an opportunity to explore these effects. We investigate the multi‐regional supply chain risk by focusing on credit risk measured by abnormal CDS spreads and US‐China supply chain networks. Our evidence shows that local risks propagate through global supply chains to other regions. Using a matched sample, we find that abnormal CDS spreads for firms with Chinese supply chain partners increase by 12‐13 percent relative to the average raw CDS spreads due to supply chain disruptions during the economic shutdown in China, and the abnormal CDS spreads decrease by 9‐13 percent relative to the average raw CDS spreads when the supply chain activities resume in China. We also find that having a more global customer base can mitigate the effects of local household demand shocks. Lastly, we discover that firm size, supply chain network centrality, cash holdings, inventory, strong credit ratings, capital redeployability, and the number of segments increase resilience to global supply chain shocks, while financial leverage, operational leverage, and market competition weaken supply chain resilience.
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This paper provides evidence that the formation of global supply chain partnerships leads to an increased usage of cross‐border financing. The findings are detected in all three major financing markets—equities, syndicated loans, and public debt. Difference‐in‐differences tests allow us to draw a causal interpretation of our main findings, which also holds in several robustness tests. Our findings suggest that increased cross‐border financing reflects greater ability to access global financial markets, due to enhanced firm visibility and investor attention, as well as operational forces that arise when establishing new global supply chain partnerships. Specifically, we provide evidence that firms that are small, held less by institutional investors, and followed by fewer analysts have more benefits in cross‐border financing from the formation of the global supply chain. Our findings have important implications for firms attempting to integrate into the global supply chain network. More broadly, our findings suggest that the information generated by operational activities can have significant effects on subsequent financing activities.
Network literature has widely documented that the managerial ties between corporate leaders in two firms can promote their economic exchanges in supply chains, i.e., social embeddedness. In this study, we strive to advance this line of inquiry by exploring the dynamics of such socially embedded supply chains, examining whether and when the dissolution of managerial ties between two firms would cause the subsequent termination of their supplier‐buyer exchanges. We address this question by distinguishing two types of socially embedded supply chains based on their different relational origins: business‐with‐friend links in which the managerial ties precede the supply chains, and friend‐in‐business links in which the supplier‐buyer exchanges precede the managerial ties. We posit that the managerial tie dissolution has a negligible effect on the subsequent termination of supply chains in business‐with‐friend links. In contrast, in friend‐in‐business links, the dissolution of managerial ties between two firms is associated with a significantly higher likelihood for their supplier‐buyer exchanges to dissolve afterward. We find strong empirical evidence for the above propositions using a nuanced dataset that integrates the managerial tie information and the supply chain data. In sum, we show that socially embedded supply chains with different origins (“doing business with friends” versus “making friends in business”) would have distinct patterns of evolution and dissolution. This article is protected by copyright. All rights reserved
We offer a new network perspective on one of the central topics in operations management—the bullwhip effect (BWE). The topic has both practical and scholarly implications. We start with an observation: the variability of orders placed to suppliers is larger than the variability of sales to customers for most firms, yet the aggregate demand variability felt by suppliers upstream does not amplify commensurably. We hypothesize that changes to the supplier’s customer base can smooth out its aggregate demand. We test the hypothesis with a data set that tracks the evolution of supply relationships over time. We show that the effect of customer base management extends beyond the statistical benefits of aggregation. In particular, both the formation and the dissolution of customer-supplier relationships are associated with the smoothing of the aggregate demand experienced by suppliers. This provides fresh insight into how firms may leverage their customer-supplier relationships to mitigate the impact of the BWE.
This paper was accepted by Jay Swaminathan, operations management.
Problem definition: Manufacturing firms are undergoing restructuring defined by a collection of adjustments and decisions, which affect the source and destination of manufactured products throughout the firm's global supply chain network. We report on a comprehensive picture of manufacturing sourcing on a global basis. Academic/practical relevance: With dynamic changes in global economic, political, and technological conditions, the design of global supply chain strategies has become critically important for executives and has great potential for operations management research. Methodology: Our work is based on a global field study conducted in 2014 and 2015 among leading manufacturers from a wide range of industries. The data set has the distinguishing feature of reflecting actual decisions that the firms made recently (during the last three years). Results: Companies are currently restructuring their global production footprints. The majority of firms engage in offshoring. Reshoring does occur but seldom for corrective reasons. China remains the most attractive site for production sourcing, followed by Eastern Europe and Southern Asia. Manufacturing continues to decline in the developed economies of Japan and Western Europe. We observe that while North America may be at the cusp of a manufacturing renaissance, such a change is not just because of reshoring by domestic firms. Labor cost no longer dominates manufacturing location decisions; rather, firms decide based on complex trade-offs among a variety of factors. Finally, firms localize production in developed economies and use developing economies as production hubs. Managerial implications: Our goal in this paper is to inform both managerial policy decisions and the academic research agenda by developing insights on managerial practices that concern production sourcing and on the factors that drive such decisions. We develop hypotheses concerning how firms make these strategy decisions, and we discuss implications for analytical and empirical research.
This article reviews the empirical evidence on firm heterogeneity in international trade. A first wave of empirical findings from microdata on plants and firms proposed challenges for existing models of international trade and inspired the development of new theories emphasizing firm heterogeneity. Subsequent empirical research has examined additional predictions of these theories and explored other dimensions of the data not originally captured by them. These other dimensions include multiproduct firms, offshoring, intrafirm trade and firm export market dynamics.
Product design decisions substantially affect the cost and revenue drivers. A design configuration with commonality can lower manufacturing cost. However, such a design may hinder the ability to extract price premiums through product differentiation. We explicitly investigate the marketing-manufacturing trade-off and derive analytical implications for three possible design configurations: unique, premium-common, and basic-common. Our model considers two distinct segments of consumers. Some of the implications of our analysis are not readily apparent. For example, when the high-quality component is made common, the average quality of the products offered to the two segments increases. One may infer that with higher average quality, higher prices or higher total revenues might ensue. However, this may not be the case, as detailed in the paper. Finally, our analysis provides a useful framework to develop an index that can rank order components in terms of their attractiveness for commonality.
Product variety is an important strategic tool that firms can use to attract customers and respond to competition. This study focuses on the retail industry and investigates how stores manage their product variety, contingent on the presence of competition and their actual distance from rivals. Using a unique data set that contains all Best Buy and Circuit City stores in the United States, the authors find that a store's product variety (i.e., number of stock-keeping units) increases if a rival store exists in its market but, in the presence of such competition, decreases when the rival store is collocated (within one mile of the focal store). Moreover, collocated rival stores tend to differentiate themselves by overlapping less in product range than do noncollocated rivals. This smaller and more differentiated product variety may be because of coordinated interactions between collocated stores. In summary, this paper presents evidence of both coordination and competition in retailers' use of product variety.
This paper was accepted by Bruno Cassiman, business strategy.
Using a panel of credit default swap (CDS) spreads and supply chain links, we observe that both favorable and unfavorable credit shocks propagate through supply chains in the CDS market. Particularly, the three-day cumulative abnormal CDS spread change (CASC) is 63 basis points for firms whose customers experienced a CDS up-jump event (an adverse credit shock). The value is 74 basis points if their suppliers experienced a CDS up-jump event. The corresponding three-day CASC values are –36 and –38 basis points, respectively, for firms whose customers and suppliers, respectively, experienced an extreme CDS down-jump event (a favorable credit shock). These effects are approximately twice as large for adverse credit shocks originating from natural disasters. Credit shock propagation is absent in inactive supply chains and is amplified if supply chain partners are followed by the same analysts. Industry competition and financial linkages between supply chain partners, such as trade credit and large sales exposure, amplify the shock propagation along supply chains. Strong shock propagation persists through second and third supply chain tiers for adverse shocks but attenuates for favorable shocks.
This paper was accepted by Kay Giesecke, finance.
Using a multitier mapping of supply-chain relationships constructed from granular global, firm-to-firm supplier–customer linkages data, we quantify the degree of financial risk propagation from the supply network beyond firms’ direct supply-chain connections and isolate structural network properties serving as significant moderators of risk propagation. We first document a baseline fact: a significant proportion of tier-2 suppliers are shared by tier-1 suppliers. We then construct two simple metrics to capture the degree of tier-2 sharing and disentangle its effect from tier-2 suppliers’ own risks. We show that the focal firms’ risk levels are significantly related to the proportion of shared tier-2 suppliers in their supply network, and the effect becomes monotonically stronger as their tier-2 suppliers become more highly shared. Finally, we uncover causal relationships behind these associations using a new source of exogenous, idiosyncratic risk events in an event study setting. We show that, as tier-2 suppliers are impacted by these events, focal firms experience negative abnormal returns, the magnitude of which is significantly larger when the impacted tier-2 suppliers are more heavily shared. Overall, our study uncovers the subtier network structure as an important risk source for the focal firm, with the degree of tier-2 sharing as the main moderator. Our results also provide the microfoundation for a common structure in idiosyncratic risks and suggest the importance of incorporating the effect of subtier supply network structure in the portfolio-optimization process.
This paper was accepted by Vishal Gaur, operations management.
This paper considers how research in operations management can support the development of strategies for the design and management of global supply chains. It includes a model-based statement of the problem and an overview of highlights of past research that is relevant to both theory and practice. The paper identifies opportunities for research that focus on how global supply chain modeling can inform the current debate concerning the reaction of firms to changes in government policy that are relevant to global manufacturing and logistics. This includes policy changes, such as tariffs, content requirements, taxes, and investment incentives.
Over the last 20 years, the journal Manufacturing & Service Operations Management (M&SOM) has expanded its original focus to include innovative operations, environmentally sustainable operations, and socially responsible operations. As we celebrate M&SOM’s 20th anniversary, this special issue is intended to renew M&SOM’s commitment to publish operations management research articles that are relevant, innovative, and rigorous. This paper reflects on the development of M&SOM over the last 20 years and discusses the exciting future of the journal.
Applied econometricians frequently apply the inverse hyperbolic sine (or arcsinh) transformation to a variable because it approximates the natural logarithm of that variable and allows retaining zero‐valued observations. We provide derivations of elasticities in common applications of the inverse hyperbolic sine transformation and show empirically that the difference in elasticities driven by ad hoc transformations can be substantial. We conclude by offering practical guidance for applied researchers.
We estimate the effect of supply chain proximity on product quality. Merging four automotive data sets, we create a supply chain sample that reports the failure rate of 27,807 auto components, the location of 529 upstream component factories, and the location of 275 downstream assembly plants. We find that defect rates are higher when upstream and downstream factories are farther apart. Specifically, we estimate that increasing the distance between an upstream component factory and a downstream assembly plant by an order of magnitude increases the component’s expected defect rate by 3.9%. We find that quality improves more slowly across geographically dispersed supply chains. We also find that supply chain distance is more detrimental to quality when automakers produce early-generation models or high-end products, when they buy components with more complex configurations, or when they source from suppliers who invest relatively little in research and development.
This paper was accepted by Vishal Gaur, operations management.
Trade occurs between firms both across borders and within countries, and most trade transactions include at least one large firm with many trading partners. This article reviews the literature on firm-to-firm connections in trade. A growing body of evidence coming from domestic and international transaction data has established empirical regularities that have inspired the development of new theories emphasizing firm heterogeneity among both buyers and suppliers in production networks. Theoretical work has considered both static and dynamic matching environments in a framework of many-to-many matching. The literature on trade and production networks is at an early stage, and there are many unanswered empirical and theoretical questions.
Firms in a vertical relationship are likely to affect each other’s productivity. Exactly how does productivity spill over across this type of relationship (i.e., through which mechanisms)? Additionally, how does the relative importance of these mechanisms depend on the structure of the supply chain? To answer these questions, we decompose the channels of upstream productivity spillovers—from customers to suppliers—by developing a structural econometric model on a sample of approximately 22,500 supply chain dyads. We find that the “endogenous channel” (i.e., the effect of the customer’s own productivity on the supplier’s productivity) is by far the most important source of spillovers. This is especially true if (i) the supplier has a concentrated customer base, (ii) the supplier and the customer have similar operational characteristics, and (iii) the relationship has medium maturity. In the converse scenarios, we find, it is more important to have a partner with a portfolio of favorable “contextual” characteristics (high inventory turnover, financial liquidity, and asset turnover) than to have a productive partner.
The online appendix is available at https://doi.org/10.1287/mnsc.2016.2632.
This paper was accepted by Serguei Netessine, operations management.
We study sourcing in a supply chain with three levels: a manufacturer, tier 1 suppliers, and tier 2 suppliers prone to disruption from, e.g., natural disasters such as earthquakes or floods. The manufacturer may not directly dictate which tier 2 suppliers are used but may influence the sourcing decisions of tier 1 suppliers via contract parameters. The manufacturer’s optimal strategy depends critically on the degree of overlap in the supply chain: if tier 1 suppliers share tier 2 suppliers, resulting in a “diamond-shaped” supply chain, the manufacturer relies less on direct mitigation (procuring excess inventory and multisourcing in tier 1) and more on indirect mitigation (inducing tier 1 suppliers to mitigate disruption risk). We also show that while the manufacturer always prefers less overlap, tier 1 suppliers may prefer a more overlapped supply chain and hence may strategically choose to form a diamond-shaped supply chain. This preference conflict worsens as the manufacturer’s profit margin increases, as disruptions become more severe, and as unreliable tier 2 suppliers become more heterogeneous in their probability of disruption; however, penalty contracts—in which the manufacturer penalizes tier 1 suppliers for a failure to deliver ordered units—alleviate this coordination problem.
This paper was accepted by Yossi Aviv, operations management.
We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence – including human readings of 12,000 newspaper articles – indicate that our index proxies for movements in policy-related economic uncertainty. Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, healthcare, finance and infrastructure construction. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies. Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s.
Firms mitigate uncertainty in demand and supply by carrying safety stock, planning for excess capacity and diversifying supply sources. In this paper, we provide a framework to jointly optimize these three levers in a periodic review infinite horizon setting, and in particular we examine how one can reduce inventory and capacity investments through proper diversification strategies. Observing that a modified base-stock inventory policy is optimal, we find that the capacity-diversification problem is well-behaved and characterize the optimal mix of safety stock, excess capacity and extra number of supply sources. We find that higher supply uncertainty results in higher safety stock, more excess capacity, and higher diversification. But safety stock and diversification are non-monotonic in demand uncertainty. Our results can be extended to situations in which suppliers are heterogeneous, and can be used to develop effective heuristics.This article is protected by copyright. All rights reserved.
This paper empirically examines whether operational slack, business diversification, geographic diversification, and vertical relatedness influence the stock market reaction to supply chain disruptions. The results are based on a sample of 307 supply chain disruptions announced by publicly traded firms during 1987–1998. Our analysis shows that firms with more slack in their supply chain experience less negative stock market reaction. The extent of business diversification has no significant effect on the stock market reaction. Firms that are more geographically diversified experience a more negative stock market reaction. We find that firms with a high degree of vertical relatedness experience a less negative stock market reaction. These results have important implications on how firms design and operate their supply chains to mitigate the negative effect of supply chain disruptions.
In this paper, we present a review of the models for the management of global supply chains and some evidence concerning current practice. Our review is restricted to the literature on intrafirm global supply chains and is motivated by empirical data concerning the extent of intrafirm globalization. The review of the literature suggests that research has not evolved in a coherent manner, while the data suggest that the extent of globalization is also hard to gauge. Indeed, the journey toward supply chain globalization is far from over. Significant gaps exist between theory and the practice. We conclude with a summary of directions for future research.
A system of interconnected buyers and suppliers is better modeled as a network than as a linear chain. In this paper we demonstrate how to use social network analysis to investigate the structural characteristics of supply networks. Our theoretical framework relates key social network analysis metrics to supply network constructs. We apply this framework to the three automotive supply networks reported in Choi and Hong (2002). Each of the supply networks is analyzed in terms of both materials flow and contractual relationships. We compare the social network analysis results with the case-based interpretations in Choi and Hong (2002) and conclude that our framework can both supplement and complement case-based analysis of supply networks.
We document cycles in corporate investment corresponding with the timing of national elections around the world. During election years, firms reduce investment expenditures by an average of 4.8% relative to nonelection years, controlling for growth opportunities and economic conditions. The magnitude of the investment cycles varies with different country and election characteristics. We investigate several potential explanations and find evidence supporting the hypothesis that political uncertainty leads firms to reduce investment expenditures until the electoral uncertainty is resolved. These findings suggest that political uncertainty is an important channel through which the political process affects real economic outcomes.
We study competition between two multiproduct firms with distinct production technologies in a market where customers have heterogeneous preferences on a single taste attribute. The mass customizer (MC) has a perfectly flexible production technology and thus can offer any variety within a product space, represented by Hotelling's linear city. The mass producer (MP) has a more focused production technology and therefore offers a finite set of products in the same space. The MP can invest in more flexible technology, which reduces its cost of variety and hence allows it to offer a larger set of products; in the extreme, the MP can emulate the MC's technology and offer infinite variety. The firms simultaneously decide whether to enter the market, and the MP chooses its degree of product-mix flexibility on entry. Next, the MP designs its product line--i.e., the number and position of its products--the MC's perfectly flexible technology makes this unnecessary. Finally, both firms simultaneously set prices. We analyze the subgame-perfect Nash equilibrium in this three-stage game, allowing firm-specific fixed and variable costs that together characterize their production technology. We find that an MP facing competition from an MC offers lower product variety than an MP monopolist to reduce the intensity of price competition. We also find that the MP can survive this competition, even if it has higher fixed cost of production technology, higher marginal cost of production, or both.
I propose a network/search view of international trade in differentiated products. I present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers, and that search barriers to trade are higher for differentiated than for homogeneous products. I also discuss alternative explanations for the findings.
Are all film stars linked to Kevin Bacon? Why do the stock markets rise and fall sharply on the strength of a vague rumour? How does gossip spread so quickly? Are we all related through six degrees of separation? There is a growing awareness of the complex networks that pervade modern society. We see them in the rapid growth of the Internet, the ease of global communication, the swift spread of news and information, and in the way epidemics and financial crises develop with startling speed and intensity. This introductory book on the new science of networks takes an interdisciplinary approach, using economics, sociology, computing, information science and applied mathematics to address fundamental questions about the links that connect us, and the ways that our decisions can have consequences for others.
The formulation of strategy can be fruitfully viewed as placing bets on certain markets and on certain links of the value-added chain. The key to understanding a global strategy is to locate how competitive positions in one national market change the economics for entry into the other countries and into the product lines. This article argues that global strategies succeed by creating certain economies along and the between value-added chains and by designing marketing programs that adapt products to national needs and yet exploit these upstream economies. Two major conclusions are that a company can compete in different strategic groups across countries and that a hallmark feature of a global strategy is the creation of operational flexibility to benefit from uncertainty.© 1984 JIBS. Journal of International Business Studies (1984) 15, 151–167