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Firm-specific political risk: a systematic investigation of its antecedents and implications for vertical integration and diversification strategies

Di Fan (The Hong Kong Polytechnic University, Kowloon, China)
Chengyong Xiao (Department of Operations, University of Groningen, Groningen, The Netherlands)

International Journal of Operations & Production Management

ISSN: 0144-3577

Article publication date: 27 December 2022

67

Abstract

Purpose

Uncertainties caused by political risks can drastically affect global supply chains. However, the supply chain management literature has thus far developed rather limited knowledge on firms' perception of and reactions to increased political risks. This study has two main purposes: to explore the relationship between extant risk exposure and perceived firm-specific political risk and to understand the impact of firm-specific political risk on firms' vertical integration and diversification strategies.

Design/methodology/approach

The authors developed a unique dataset for testing our hypotheses. Specifically, the authors sampled manufacturers (SIC20-39) listed in the United States from 2002 to 2019. The authors collected financial and diversification data from Compustat, vertical integration data from the Frésard-Hoberg-Phillips Vertical Relatedness Data Library and political risk data from the Economic Policy Uncertainty database. This data collection process yielded 1,287 firms (8,329 observations) with available data for analysis.

Findings

A two-way fixed-effect regression analysis of panel data revealed that firms tend to be more sensitive to political risk when faced with income stream uncertainty or strategic risk. By contrast, exposure to stock returns uncertainty does not significantly influence firms' sensitivity toward political risk. Moreover, firm-specific political risk is positively associated with vertical integration and product diversification. However, firm-specific political risk does not result in higher levels of geographical diversification.

Originality/value

This study joins the literature that systematically explores the antecedents and implications of firm-specific political risk, thus broadening the scope of supply chain risk management.

Keywords

Acknowledgements

Funding: This research is partly supported by Research Grant Council of Hong Kong, Grant/Award Number: 15504421.

Citation

Fan, D. and Xiao, C. (2022), "Firm-specific political risk: a systematic investigation of its antecedents and implications for vertical integration and diversification strategies", International Journal of Operations & Production Management, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOPM-02-2022-0094

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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