Navigating Social Conflicts Along the Global Value Chain

Project: Research project

Project Details

Description

The escalation of social conflicts on a global scale, exemplified by significant disputes like the Russia-Ukraine, Syrian, and Israeli-Palestinian conflicts, is increasingly prevalent. Notably, local social conflicts are also burgeoning. According to the 2011 World Development Report, 1.5 billion people, or 1/5 of the total population reside in countries that are impacted by fragility, conflict, or violence. A more concerning trend is observed by the United Nations: the number of countries grappling with violent conflicts has surged, marking the highest figures in nearly three decades in 2016. Firms operating within regions affected by social conflicts bear substantial economic consequences. Importantly, these repercussions can extend far beyond the immediate local economy, impacting even firms situated in regions seemingly untouched by the conflicts.

The 2020 World Development Report underscores a critical aspect of this issue: international trade along the global value chain (GVC) has surpassed 50% of global trade volume in 2018. When international firms engage with conflict-affected suppliers, the repercussions can reverberate across peaceful regions. Consequently, the economic costs of social conflicts can far surpass local boundaries, constituting a substantial burden on the global economy as a whole. When sufficiently strong, the impact can reshape the comparative advantages enjoyed by various regions, subsequently influencing the distribution of global production and trade dynamics.

To comprehensively explore this phenomenon, our research first endeavors to quantify the impact of social conflicts on the performance of US firms with international suppliers exposed to these conflicts, from 2007 to 2019. This analysis is conducted through the amalgamation of various proprietary firm-level datasets, encompassing Panjiva, EventRegistry, and D&B Individual Business data. Upon establishing the baseline effect, our study investigates the specific channels through which social conflicts influence US firms. We commence by examining the impact on US firms through reduced supply, increased prices, or changes in product quality. Additionally, the adverse effects of social conflicts of international suppliers can be particularly detrimental due to the distinctive complexities of international transactions: substantial adjustment costs and heightened contractual difficulties.

In navigating these challenges, firms can adopt various sourcing strategies, including redistributing imports to similar international suppliers, terminating relationships with affected suppliers, or seeking new suppliers for identical products. The selection of new suppliers involves pivotal decisions, ranging from geographic proximity (near-shoring), political alignment (friend-shoring), to domestic sourcing within the US (re-shoring). These decisions carry the potential to significantly reconfigure global production and trade dynamics, steering them toward regionalization rather than globalization. In essence, our study seeks to illuminate these complex issues by analyzing the strategic responses adopted by firms in the face of social conflicts along their GVC.
StatusNot started
Effective start/end date1/01/2531/12/26

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