Chinese Manufacturers under Global Supply Chain Challenges

• In Event: Is Global Capitalism Good for Democracy?

Abstract

How do firms embedded in global supply chains (GSC) respond to geopolitical tensions? Emergent challenges to globalization, including great power competition, decoupling pressures, local protectionism, and weaponization of economic interdependence, are testing the resilience of GSC. Existing research propose competing expectations about the impact of such system-level changes on firms’ adjustment strategies and corresponding GSC reshuffling. One type of argument suggests that firms are still mostly driven by commercial and economic incentives, especially privately-owned firms. Political considerations do not significantly factor into firms’ decisions in (re)configuring their supply chain networks and (re)locating their business operations overseas. The opposite view posits that such geopolitical tensions are highly disruptive to the global supply chain landscape, and firms are concerned with the political ramification of their trade and investment activities. We examine the question by conducting a conjoint experiment with a sample of senior managers of over 1,000 manufacturing firms in China, a country where firms generally operate under heavy influences of the state’s policy prerogatives. Meanwhile, these same firms are also increasingly facing headwinds caused by geopolitical tensions, prompting many to consider relocating part of their businesses to third countries. We analyze the locational preferences of our sample, comprising 76% privately-owned firms, 14% state-owned firms, and firms of other ownership types. We find that firms are significantly more likely to move or relocate their operations to countries that take a pro-China stance in foreign policy than countries that are pro-America or independent. Meanwhile, in terms of effect sizes, Chinese firms are more likely to move or relocate their operations to countries with free trade agreements with China than to countries within the belt and road initiative, a far-reaching infrastructure project suspected of challenging the existing rules of global economic order. Thus, Chinese firms seem to demonstrate both nationalistic and institutionalist tendencies towards global engagement. Compared with extant findings on Western firms, Chinese firms are less concerned with intellectual property protection and labor costs. Notably, host country’s tax incentives only attract Chinese firms when they do not have strict constraints attached. What's even more intriguing is that Chinese firms even prefer locations with no tax incentives at all to locations attaching stringent conditions to their tax incentives. The overall evidence suggests that Chinese firms are still embracing existing economic governance frameworks while pursing nationalistic interests with significant political sensitivity. Our study has implications for understanding the future development and shifts of GSC, especially trends involving Chinese businesses.

Authors

• Xiaojun Li, University of British Columbia

• Jiwei Qian, National University of Singapore

• Jian Xu, National University of Singapore