Industrial Chain Risk Exposure and Economic Volatility: A Framework Incorporating Foreign‐Invested Enterprises

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ABSTRACTWe introduce a novel accounting framework to assess the risk exposure on both the demand and supply sides of industrial chains incorporating foreign direct investment. The new framework considers the role of foreign‐invested enterprises, their interactions with domestic‐owned firms and their involvement in international trade. Using the AMNE‐ICIO data, we conducted an in‐depth analysis of risk exposure for China's industrial chain and its correlation with economic volatility. Our study yielded four key findings. (1) The trajectories of China's industrial chain risk exposure on both the demand and supply sides generally align, exhibiting a downward trend. Conventional methods without distinction between foreign‐invested enterprises and domestic‐owned firms significantly underestimate China's industrial chain risk exposure. (2) There exists a marked disparity in risk exposure across different countries and sectors, with developed countries and high‐tech manufacturing sectors facing substantially higher risks. (3) As pivotal actors in the global production network, China and the United States hold critical positions in the global industrial chains. (4) Empirical results indicate that, compared to country sectors with lower risk exposure, those facing higher risk exposure prior to the global financial crisis experienced greater economic volatility following the crisis.