The profitability implications of supplier concentration during economic recession and restoration: the moderating role of supply localization

Abstract

Economic recessions and restoration change the dynamics of demand and supply in the supply chain. How to match supplier relationships with the dynamic changes to sharp profitability performance is pivotal for firms’ supply chain management during economic waves. Based on the Resource Dependence Theory, changes in demand-side and supply-side resources alter the power-balanced relationship between a firm and its concentrated supplier, affecting the implications of supplier concentration on a firm’s profitability performance in the economic recessions and restoration stages. Furthermore, we consider the moderating role of suppliers’ spatial location, exploring whether a higher proportion of intra-provincial suppliers (i.e., supply localization) helps improve the profitability implications of supplier concentration. Based on the sample of 3319 listed companies in China from 2020 to 2021, we find that: (1) in the economic recession stage, supplier concentration is positively correlated with firm profitability, and this positive relationship is amplified by a higher proportion of intra-provincial supplier transactions; (2) in the economic restoration stage, supplier concentration is negatively correlated with firm profitability, and the higher proportion of intra-provincial supplier transactions aggravates this negative relationship. The 2SLS method is applied to verify the main effects, and we used alternative variable measurements and different model settings to verify the robustness of the findings. The results provide a deeper reference for firms to consider appropriate supplier relationships in response to economic waves.