Political risk and corporate international supply chain

Abstract

This paper examines the effect of countries’ political risk on corporate international supply chain. Using the survey data of firms in 32 countries, we find that political risk decreases firms’ purchasing proportion from foreign suppliers. We also find that the effect is less pronounced for firms with business association membership and whose main market is international, and firms in countries with better institutional environments and higher degree of development. Studies on influencing channels show that political risk decreases corporate international purchasing through the increase in corporate informal payments and the decrease in willingness to apply for import licenses. Finally, we find that the reduced corporate international purchasing accompanied by political risk decreases firms’ capacity utilization, expected sales, and research and development activities. Collectively, our findings provide new evidence on the role of political risk for firms’ international purchasing decisions.