HIGHLIGHTS & IMPLICATIONS:
- The study developed a legitimacy–efficiency framework, arguing that U.S. firms have adjusted supply chains in rival countries by balancing home-government pressures to derisk with the economic costs of reconfiguring operations.
- Using a firm-year panel of U.S.-based non-financial listed firms (2009–2022) and a difference-in-differences design, the researchers found that, after 2017, U.S. firms in strategic industries had 29% fewer Chinese suppliers relative to firms in non-strategic industries.
- The initial gap in Chinese suppliers was concentrated among Republican-leaning firms under the first Trump administration but later extended under the Biden administration, and the gap narrowed for firms more dependent on China, suggesting that political pressures are tempered by efficiency considerations.
The recent geopolitical rivalry—most notably between the U.S. and China—has fuelled a resurgence of geopolitical risks for firms. This is defined as disruptions driven by state actions seeking advantages over rival countries. A significant source of geopolitical risks stems from firms’ home governments, which may pressure firms to ‘decouple’ or ‘derisk’ from rival countries.
Home governments can impose regulatory scrutiny, withdraw benefits, or create policy uncertainty for firms that do not align with national geopolitical objectives. Yet, whether and how firms adjust their global operations to align with these national strategies is a critical but underexplored question. This is especially the case between in rival countries. The current study addressed this question by using a novel firm-level database to examine how U.S. firms adjust their suppliers in China in response to heightened U.S.–China tensions.
The researchers’ theoretical perspective was built on discussions in international business that highlighted the tensions that firms face in navigating geopolitical challenges and the decision to reduce dependence on a rival country.
On the one hand, firms in strategically important industries have experienced political pressures from their home governments to derisk. These pressures may have driven firms to shift production from rival countries to home or allied countries. On the other hand, firms’ responses are also influenced by economic factors, such as their dependence on rival countries and their relocation capability. For firms with high market or technological dependence on a rival country and limited suitable alternatives, compliance with the home government’s derisking strategy could be prohibitively costly.
The researchers proposed that firms’ supply chain adjustments in rival countries reflect a balance between preserving political legitimacy with their home government and seeking economic efficiency.
Based on these discussions and research on firm–government relations, the researchers proposed that firms’ supply chain adjustments in rival countries reflect a balance between preserving political legitimacy with their home government and seeking economic efficiency. Research on managing political environments has long suggested that the pursuit of political legitimacy drives firms to conform to government pressures and adopt practices favoured by the government.
Recent work has suggested that national security concerns can prompt home governments to pressure firms to exit host countries perceived as geopolitical adversaries, with firms complying to maintain legitimacy at home. Firms viewed as legitimate by their home government often benefit from better access to critical resources and face fewer regulatory scrutiny and other negative government actions. Therefore, maintaining legitimacy with home governments is an important consideration for firms to mitigate geopolitical risks associated with the home government’s actions. However, firms’ tendency to align with their home government’s preferences is also bounded by their efficiency considerations.
The researchers investigated the legitimacy-efficiency tradeoff facing U.S. firms in the context of U.S.–China rivalry. Since the beginning of the first Trump administration in 2017, the U.S. economic approach toward China substantially shifted from a liberal to a more restrictive stance, particularly in industries vital to national security, otherwise known as strategic industries. The U.S. government had promoted a new norm for U.S. firms in strategic industries, which is to reduce their supply chain reliance on China.
The researchers posited that since 2017, U.S. firms in strategic industries are more likely to align with their home government’s national strategy by restricting the number of suppliers in China compared to firms in non-strategic industries. They further argued that the extent to which firms in strategic industries conform to national strategies depends on their sensitivity to maintaining political legitimacy with their home government.
U.S. firms in strategic industries had 29% fewer Chinese suppliers after 2017, relative to firms in non-strategic industries.
To test this, the researchers compiled a firm-year panel dataset of U.S.-based non-financial listed firms from 2009 to 2022. They employed a difference-in-differences (DID) design to examine the relative gap in the number of suppliers in China between U.S. firms in strategic and non-strategic industries before and after 2017, when the U.S. approach toward China underwent a fundamental shift. The study reveals that while U.S. firms in both groups increased their number of suppliers in China throughout the period, the rate of the increase differed after 2017. U.S. firms in strategic industries had 29% fewer Chinese suppliers after 2017, relative to firms in non-strategic industries.
This finding supports the core argument that U.S. firms in strategic industries adopted a more cautious stance on maintaining suppliers in China amid rising geopolitical risks. The study also suggests that this disparity was initially pronounced only among Republican-leaning firms during the first Trump administration (2017–2020) but later extended to firms across the political spectrum under the Biden administration (2021–2022).
This suggests that political leaning shaped firm responses before bipartisan consensus on China emerged, but mattered less afterwards. Furthermore, the researchers found the gap between U.S. firms in strategic and non-strategic industries narrowed among firms with a greater dependence on China’s market or supply base, suggesting that efficiency considerations may temper the inclination to align with national strategies.
This study introduces a legitimacy–efficiency framework to explain how U.S. firms adjust supply chains in rival countries amid rising geopolitical tensions. Firms face a tradeoff between meeting domestic political demands to maintain legitimacy and managing the economic costs of supply chain reconfiguration. The study’s framework is especially relevant when considering the second Trump administration, which has emphasised economic nationalism and reshoring, coupled with a hardline stance on China.
Keywords: Geopolitical risks, U.S.–China rivalry, Supply chain adjustment, Political legitimacy, Firm partisan positioning, Economic dependency
* Learn more from the full research article here:
https://doi.org/10.1057/s41267-025-00800-3