Concentrate or Diversify? Economic Policy Uncertainty and Supplier-Base Concentration

Abstract

Risks of abrupt changes in economic policies not only affect many segments of firms' operations, but also compromise the stability of the supply chain. Based on the data from listed companies in China between 2001 and 2020, this paper examines how firms stabilize their supply chain structure amidst growing economic policy uncertainty. Our findings reveal that, in response to increasing policy uncertainties, companies tend to stabilize supply chains by diversifying their supplier base. This impact is more prominent when firms face greater supply risks and a higher degree of market uncertainty. In addition, we discuss the timeliness and structural changes of firms' supplier-base in detail. Our results remain consistent across various endogeneity tests, providing empirical evidence for how economic policy uncertainty shapes firms' supply chain decisions. Policymakers can enhance understanding of firms' supply chain adjustment strategies in the face of rising policy uncertainty.