Global operations and supply‐chain management under the political economy

Abstract

Technological advancements in transportation and telecommunications in the 1980s enabled firms to leverage resources from other countries to produce and sell goods in the global market. Global trade among nations should create financial incentives for countries to maintain peaceful relations with their trading partners by forming interdependent relationships (Daniels et al., 2015). The ability to globalize a supply chain enables countries to deploy their production and distribution advantages to serve customers better while strengthening their economies. Operations and supply chain management (OSCM) scholars have increasingly considered operations that cross national boundaries, guiding firms seeking to operate effectively in a global environment (e.g., Cohen & Kouvelis, 2021; Dong & Kouvelis, 2020; Prasad & Babbar, 2000). Many macroeconomists have explained the formation of a globalized supply chain from a neoclassical economics perspective, assuming that decision-makers are rational and that countries can generally benefit from the exchange of necessary goods. In general, firms may leverage global sourcing and production to gain a competitive advantage by offering products at lower prices (cost leadership) or offering unique products targeting specific needs (differentiation; Porter, 1980). Firms employing a cost leadership strategy source materials and products globally from locations with lower labor and production costs, and firms employing differentiation strategies seek specialized knowledge and natural resources from other countries to develop products with unique features. Political factors have also contributed to the globalization of supply chains. Trade agreements have served as effective tools for promoting economic development in many developing countries. After World War II, the United States led a movement to reduce tariff rates and import and export quotas. In the late 1980s, the idea of free trade received widespread support from governments and the business sector, resulting in the establishment of the World Trade Organization (WTO) in 1995 and the conclusion of several regional and bilateral trade agreements. Globalization advanced rapidly for decades until the COVID-19 pandemic and geopolitical tensions (such as the Brexit vote in 2016, the US–China trade wars starting in 2018, and the Russo–Ukrainian war in 2022) revealed the limitations of globalization. Even before these events, the rate of globalization had slowed, with global foreign direct investment and imports of goods exhibiting a downward trend since 2009 (Witt, 2019). Prolonged shortages of many products during the COVID-19 pandemic, ranging from personal protective equipment to semiconductors for cars and home appliances, awakened concerns about the vulnerabilities of global supply chains. The Russo–Ukrainian war has disrupted the flow of oil and gas and limited the availability of grain for food production, fertilizers for crop production, and neon gas for semiconductor production (Tang, 2022), intensifying calls to rethink globalization (Dai & Tang, 2022). These developments suggest that geopolitics will continue to influence OSCM and shape the research agenda in this field. The field of OSCM has long been grounded in economic theories regarding optimal decision-making by firms under constraints. However, economic and political processes are tightly intertwined. Firms operate in environments that governments regulate. Stakeholders can have different values (Yiu et al., 2021), cultures (Kull & Wacker, 2010), and ideologies (Charpin, 2021) that drive their behaviors. Even purely rational decision-makers can have diverse objective functions and time horizons. Therefore, examining the performance outcomes of operations strategies and practices is difficult without applying political and policy perspectives. Political economists, especially of the positivist school, focus on economic behaviors in relation to political processes and behaviors in the marketplace to explain social outcomes such as production, resource allocation, and public policy (Alt & Shepsle, 1990). Scholars in other business disciplines, such as tourism management (Bianchi, 2018) and international business (Li et al., 2021), have called for others to incorporate political economy perspectives into their research. OSCM research that considers political factors is increasingly popular (Chae et al., 2019; Charpin et al., 2021), and authors are encouraged to explore the intersection of OSCM with public policy (Fugate et al., 2019; Helper et al., 2021). The goal of this special issue is to build on prior research to encourage the integration of a political economy perspective in OSCM research. Scholars in OSCM have typically followed the traditions of neoclassical economics in assuming a stable, open, low-barrier, global, and free-trade environment (Dong & Kouvelis, 2020). Neoclassical economists often assume that market actors are rational in maximizing economic self-interests and that governments should minimize market interventions. Based on the assumption of rational actors, traditional economics argues that a free market creates good conditions for allocating production resources. Political influences, however, might cause policymakers to act in economically irrational ways and devise suboptimal policies, such as distorting the market through labor subsidies and protecting inefficient industries (Schultz, 1977). These policies may be rational in political logic or for longer-term economic benefit. The field of OSCM has traditionally focused on optimal decision-making under constraints in production and service contexts without considering the political landscape. However, incorporating political economy perspectives into OSCM—considering that firm and supply chain operations are embedded in a political environment—can broaden the scope and enrich the research agenda of the field. Firm operations may also shape the political environment. In an emerging stream of OSCM literature, scholars have investigated firms' responses to changes in political conditions. For example, Chae et al. (2019) and Dong and Kouvelis (2020) discussed tariffs' impact on firms' supply chain design. The former discussed how tariff severity and timing uncertainty might affect a firm's supply chain complexity, and the latter analyzed global supply chain network configurations in response to tariff changes. Political risk is a new area of focus in this emerging stream. This topic is becoming more important alongside the destabilization of the global environment (Witt, 2019). Political risk refers to the uncertainties in the political environment that affect a firm's operations and supply chain (Charpin, 2021). Hansen et al. (2017, 2019) explored the impacts of political risks on firms' offshoring engagements and entry mode decisions. Darby et al. (2020) linked policy risks with firms' inventory decisions, finding that firms tend to stockpile inventory in response to higher perceived policy risks. Leung and Sun (2021) examined the impacts of economic policy risks on firms' customer base concentration. Charpin et al. (2021) investigated how managers of multinational corporations in foreign subunits adapt their strategies in response to political risks. Roscoe et al. (2020) and Moradlou et al. (2021) unveiled firm strategies in response to the geopolitical disruption caused by Brexit. Later, Roscoe et al. (2022) expanded the investigation of geopolitical disruption to the US–China trade war and COVID-19. Charpin (2021) addressed how nationalistic sentiments can cause supply chain disruptions in multinational corporations, leading them to reshore or otherwise redesign their supply chain. In this Journal of Operations Management special issue, Dong et al. (2022) examined the impact of political leader turnover on foreign firms' supply chain involvement. The authors conceptualized the political leader's turnover as a policy risk faced by foreign firms. Thus, as a risk mitigation measure, foreign firms may reduce their supply chain transactions in that country. The authors used 454 political leader turnover events in 105 countries from 1998 to 2018 and sampled the supply chain transactions of US.-incorporated multinational corporations. Their panel data regression analyses show that the turnovers reduced foreign firms' supply chain involvement in the countries with political leader turnover. Zhang et al. (2021) conducted a panel-data regression analysis using data collected from US manufacturers and showed that firms that are slow to reduce expenditures after a drop in sales due to foreign competition have better performance in subsequent years than those that immediately reduce expenditures. They suggested that such buffering ("sticky spending") can provide an important asset cushion that increases firm resilience, leaving them better prepared for future opportunities and sales recoveries, particularly for firms facing fierce foreign competition. Lam et al. (2022) conducted a natural experiment to examine the impact of import tariff reduction on domestic firms' product quality. The authors considered import tariff reduction as an indicator of increased foreign competition. Examining US tariff data and listed firms, Lam et al. (2022) conducted a difference-in-difference (DiD) analysis and showed that import tariff reduction negatively affects domestic firms' product quality. However, operational slack, research and development (R&D) expenditures, and a product differentiation strategy of firms help mitigate the negative impact of foreign competition. Jacobs and Singh (2022) used an event study approach to examine the impact of government sanctions on a firm and its supply chain. In 2018, the U.S. Department of Commerce prohibited domestic firms from supplying products to ZTE, a Chinese telecommunication producer. The authors used the ban on ZTE as their research context and examined its impact on the firms' supply chains. They estimated that tier one and tier-two US suppliers to ZTE experienced an average reduction of 3.33% and 0.40% in their stock prices, respectively, as a result of the ban. The negative effect was more apparent when the tier-one suppliers depended more on ZTE for revenues. Further, the authors found that the ban benefited ZTE's competitors, whose stock prices advanced by 1.34%. Fan et al. (2022) examined the impact of the 2018 US–China trade war on US firms' operating performance. Their DiD analysis revealed that US firms suffered from an increase in days of inventory and lower profitability because of the trade war. Additionally, the authors found that firms that outsourced more, and that had a horizontally and spatially complex supply base relative to others in the sample suffered more during the trade war. These results suggest that a simplified supply structure could help firms cope with geopolitical risks and trade wars. In this section, we discuss some theories that we find particularly relevant for conducting OSCM research through the lens of political economy, highlighting research opportunities in this emerging stream. Our list of theories and research questions is not comprehensive. Transaction cost economics (TCE)—frequently applied in global OSCM research—challenges the neoclassical-economics assumption that transactions are cost free (Alt & Shepsle, 1990). In OSCM, transaction costs are viewed as a frictional cost of doing business with suppliers (Choi & Krause, 2006; Walker & Poppo, 1991). TCE proposes that transaction costs—coordination costs including contractual and monitoring overheads together with transaction risks from supplier opportunism and environmental uncertainty—arise from market actors being boundedly rational and opportunistic (Grover & Malhotra, 2003). Accordingly, firms tend to outsource ("buy") rather than insource ("make") when inter-firm transaction costs are low. Choi and Krause (2006) posited that a spatially widespread supply chain could increase transaction costs for firms. For example, firms diversifying their manufacturing (Lampel & Giachetti, 2013) and market (Narasimhan & Kim, 2002) internationally may incur increased costs in coordinating their supply chain. Political factors can be considered as another source of supply chain complexity and risk that can increase firms' transaction costs. For example, national animosity may lead a country to initiate discriminatory policies toward multinational corporations from a hostile country; these policies include tariffs, discriminatory procurement policies, export restrictions, and the arbitrary use of laws (Charpin, 2021). These discriminatory practices can increase the costs of sourcing from this country for multinational corporations and their supply chains. Furthermore, they may force multinational corporations to change suppliers, thus making their supply chains more complex in the short term. Low transaction costs in the global market are expected to encourage cross-border supply-chain transactions. Increases in political risk may affect cross-border transaction costs, potentially rendering cross-border transactions less attractive. When increased transaction costs caused by political instability affect firm operations, reduction of supply chain complexities may become an important part of supply chain management. In addition, firms may reduce their involvement with foreign supply chain partners as a risk mitigation measure against disruptions caused by adverse international political events (e.g., trade wars, border controls, and increased local scrutiny of enforcement). The above discussion offers opportunities to apply and advance TCE for global OSCM studies under a political economy. For example, to what extent do political factors and events affect transaction costs for multinational corporations? What measures should firms adopt to respond efficiently and effectively to increases in cross-national transaction costs? How can we design effective contracts and develop resilient buyer–supplier relationships to mitigate geopolitical disruptions? The resource-based view (RBV) asserts that firms with value creating, unique, irreplaceable, and non-substitutable resources are well positioned in facing market competition (Barney, 1991). Firms can cultivate resources to gain a sustainable competitive advantage. The growth of the global supply chain has broadened the horizon for firms to access foreign resources, helping lower production costs and differentiate products. For example, a firm may learn from its overseas plants to develop unique proprietary processes and equipment, thus improving the firm's performance (Schroeder et al., 2002). In addition, a firm may expand into a foreign market because of its special resources resulting in a competitive advantage (Hitt et al., 2016). Political factors can be essential to a firm's ability to access foreign resources. In a stable global trade environment with low barriers, multinational corporations incur low costs in distributing production resources (e.g., raw materials and engineering knowledge) globally to key manufacturing plants in strategic locations (Lampel & Giachetti, 2013). However, increased tariff and nontariff trade barriers have limited firms' access to foreign resources. Firms urgently need more knowledge to compete in a politicized and unstable global-trade environment. Nevertheless, the deglobalized supply chain might also offer opportunities that facilitate firm innovation. Innovation is essential to nurturing a firm's intellectual property (IP) resources to conduct product differentiation, boost customer value, and enhance a firm's competitive advantages. Utilizing overseas plants for learning may lead firms to overlook opportunities to learn from local communities of practice (Brown & Duguid, 1991), which may hinder product and process innovations suitable for the local environment. Thus, reshoring may facilitate a firm's learning by doing and trial and error. The focus of RBV on resources that are difficult for others to imitate or obtain has implications for intellectual property (IP) protection: The ability of a firm to compete based on IP can be undermined when it is not adequately protected. RBV thus encourages global supply chain management to include consideration of the risk of locating production in countries whose IP protection laws are not developed or enforced. Multinational corporations may encounter problems gaining competitive advantage from difficult-to-imitate resources that take the form of IP and technology transfer because of differences in IP protection across national borders. Knowledge creation and protection thus must be considered in the management of global supply chains. The practice-based view (PBV)—a modification of the RBV—is grounded on the assumption that firms do not adopt all beneficial management practices because of the bounded rationality of their decision-makers (Bromiley & Rau, 2014). The PBV framework provides insight into why firms adopt different practices in response to the uncertainties affecting the global supply chain, and examine how these practices may explain firm performance. In response to uncertain supply and demand arising from an increase in political risks, some firms may choose to increase their buffering inventory level (Darby et al., 2020), whereas others may choose to reduce buffering to facilitate supply chain reconfiguration (Handfield et al., 2020). Resource dependence theory (RDT) views organizations as open systems whose survival depends on their capability to internalize resources from the environment (Pfeffer & Salancik, 2003). The OSCM literature views suppliers and customers as crucial resource bases for firms (Crook & Combs, 2007). Political parties can provide resources for firms to reduce their environmental dependence. Political ties may facilitate a firm's access to government-controlled resources and insider information (Hillman, 2005). These advantages can lead to superior returns on assets and market share (Peng & Luo, 2000). However, the literature also suggests the potential drawbacks of political ties for firm operations. Shen et al. (2022) found that political ties are negatively associated with operational efficiency because they restrict resource utilization. Similarly, Lo et al. (2018) found that political ties cause firms to suffer more from environmental incidents. Besides resource absorption, RDT asserts that firms may attempt to reduce environmental uncertainty through political means (Pfeffer & Salancik, 2003). Strategic management scholars have widely investigated firms' decisions to partake in political activities such as lobbying for policies and legislation (Barber IV & Diestre, 2019; Kim, 2019). In the OSCM area, Helper et al. (2021) argued that many OSCM concepts such as total quality management, business process reengineering, and Six Sigma affect public policy. When political factors are a source of uncertainty, undermining buyer–supplier relations and disrupting material and service flows, governments can influence resource flows through policies and regulations (Darby et al., 2020). Uncertainty in government policy thus leads to fluctuations in information, cash, and physical flows between buyers and suppliers. In line with this view, Charpin (2021) argued that economic nationalism and national animosity can negatively affect a multinational corporation's (near-term) supply and demand flows. The dissolution of relations between some US buyers and Chinese suppliers amid the US–China trade war demonstrates this (Lau, 2021). OSCM scholars have long suggested that having a long term, stable buyer–supplier relationship helps firms maintain a competitive advantage. Future research can explore the role of political factors in buyer–supplier relationships. For example, does national animosity between two countries undermine trust between the