Featured faculty: Ko Chiu-yu
Written by Putro Harnowo

The fuss and feathers around bitcoin and cryptocurrency sometimes obscure the basic technology behind them. Indeed, blockchain, as the fundamental technology, has the potential to revolutionise industries beyond finance.

Blockchain is a distributed, encrypted digital ledger or record that everyone can see and agree on through computers. Its unique feature has opened a new mechanism called a smart contract, a self-executing agreement implemented as code on a blockchain that automatically performs actions without a middleman. Once deployed, this contract has a unique and immutable address that prevents unauthorised changes.

Leveraging this technology, a new study by Ko Chiu-yu, Associate Professor at the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School, examines how smart contracts can be utilised to solve disputes in the supply chain.

“Supply chains involve multi-tiered arrangements with numerous bilateral contracts. When disruption arises, figuring out who should bear the loss can be complicated,” says Professor Ko. “Smart contracts can automatically manage, track, and settle these losses fairly, especially when an action of a party initiates sequences of unanticipated damages that affect others.”

For instance, when a supplier fails to ship a component on schedule to an electronic assembler, the assembler would face compensation demands from the distributors for delayed delivery. A question then emerges: When actions of a party affect another party’s agreements with a third party, how should the liability be shared between the initiator and other parties for the damage?

In a study titled Sharing sequentially triggered losses: Automated conflict resolution through smart contracts, Professor Ko and his collaborators propose “the fixed-fraction rules” to fairly share responsibilities among parties in a supply chain. Each liability is split between the party that initiated the problem and the other parties that caused further damages later in the sequence.

Professor Ko compares it to a choose-your-own-adventure game with a dial. One end shows 0, which means the first party is responsible for all the costs, and the other end shows 1, which means everyone only pays for their own mistakes. The easy middle ground is to split the costs fairly between the initiator and the next party affected, using simple fairness principles like “let’s all chip in equally so nobody gets the short end” to keep the peace.

“Smart contracts can automatically manage, track, and settle losses fairly, especially when an action of a party initiates sequences of unanticipated damages that affect others.”

Professor Ko Chiu-yu

How can blockchain help?

Along with Jens Gudmundsson and Jens Leth Hougaard of the University of Copenhagen, Professor Ko takes a step-by-step approach in creating the fixed-fraction rules. They began by defining core allocation principles to balance fairness and incentives, making liabilities shared among each party based on a fixed fraction of the total loss.

A party is only aware of the agreements it participates in, so each party is only responsible for the loss associated with its own purview. Therefore, the initiator shall cover the rest of the loss since they could have done something to avoid the damage. For the loss incurred by several connected parties, the liabilities are shared equally among the initiator and the other parties. With these rules, the initiator is incentivised to avoid starting the chain of loss while also acknowledged for their limited control over further damage.

“The fixed-fraction rules operate on a similar principle to a common term in the supply chain called fixed share rate contracts, where the costs, risks, or liabilities arising from issues like delays, defects, or product recalls are shared among the involved parties based on predetermined fixed fractions,” says Professor Ko. “These terms have been shown to incentivise improved product quality.”

In ensuring fairness, the researchers further set out four principles. First, if losses occur in two different cases, the system can simply add up each party’s responsibility from both cases to get the total loss. Second, if the system combines two separate losses into one, the way of sharing the liabilities should stay fair and consistent. Third, if the number of parties involved changes, the responsibility shares also adjust accordingly. Lastly, parties not involved in causing any loss shouldn’t be responsible for anything.

To illustrate, the researchers extend the model to a scenario represented by a loss tree below, where any party can initiate the chain of loss. When B fails to meet its agreement with E, a total loss of US$19 occurs, which is calculated from a direct link with E and indirect links with F and G. According to the fixed-fraction rules using a benchmark middle-ground split, B pays US$14 to cover the full loss with E plus half of the losses with F and G (each taking an equal half as the balanced default for shared accountability). Accordingly, E cover the remaining US$5.

This approach ensures the initiator bears primary responsibility without overburdening downstream parties, maintaining incentives for prevention across the chain. Meanwhile, A, C, and D aren’t affected.

The fixed-fraction rules can be implemented in smart contracts by storing the agreements in a loss tree. Involved parties shall make deposits to cover potential losses, and with a set of functions, the blockchain can automatically compute and distribute liabilities in case of damage. If everything goes well, the deposits will be returned to conclude the deal.

The future of smart contracts

Supply chain is not the only one with an interwoven network. Given its ability to address the chain of loss, Professor Ko believes that fixed-fraction rules can be applied in other industries, such as automating cost-sharing in loan defaults, handling group claims after disasters in insurance, sharing penalties for construction delays in real estate, and many more.

However, there is a limit on how the rules can work, since their success depends on reliable data sources and integration with their supporting ecosystem. In many countries, the legal framework for smart contracts is also still evolving, and there is no uniformity in regulation about blockchain worldwide.

“Complex and high-value disputes will likely be settled through courts, as it takes time and effort to verify evidence and examine the terms stated in the contracts,” says Professor Ko. “Therefore, automatic conflict resolution works best for clear-cut, data-driven disputes with less room to argue, and facts can be verified automatically.”

With that being said, smart contracts will work best to settle smaller disputes, such as in delivery delays verified by sensors or tracking systems, e-commerce issues confirmed by delivery logs, and licensing or intellectual property breaches tracked through secure digital records.

In the era of AI, Professor Ko anticipates technologies to enhance smart contracts to be more adaptive by using predictive analytics to detect patterns and prevent disputes. Natural language processing would also be able to interpret ambiguous terms, and automated verification may validate data and trigger more accurate settlements.

“By combining AI-driven analysis with smart contracts for complex cases, and monitoring regulatory compliance in real time, technologies can improve efficiency, especially in sectors such as public services, e-commerce, and insurance,” he adds.

The post Can blockchain solve supply chain disputes? first appeared on China Business Knowledge.

Featured faculty: Yang Haibin
Written by Pan Jingyi

Global supply chains have been under pressure from trade tensions, geopolitical risks and rising logistics costs. In response, many companies are restructuring their supply chains with nearshoring and friendshoring strategies, or building closer networks with trusted partners.

These multinationals are keen to foster deeper relationships for greater security and collaboration. Strong partnerships with suppliers help ensure reliability, reduce risks and improve overall operational efficiency. Given that a company normally has multiple suppliers, it seems natural to identify the most strategic suppliers and treat them like VIPs by investing more time and resources, while managing others in a standard way. This approach is known as the differentiated relational strategy.

“Using differentiated relational strategy enables buyers to allocate their limited managerial resources effectively to achieve the highest returns,” says Yang Haibin, Professor at the Department of Management of the Chinese University of Hong Kong (CUHK) Business School.

However, there is a catch. In collectivist cultures like China, where equality within a group is valued, such a strategy may be perceived as favouritism and generate resentment. Suppliers serving the same buyer expect similar respect and fair treatment.

“A collectivist country emphasises tightly knit relational networks and the equality principle of reward allocation among network members.”

Professor Yang Haibin

For global companies that rely on Chinese suppliers, whether based in China or operating overseas, effective management of supplier relationships is paramount. Therefore, in collaboration with Yan Zebin of Guangdong University of Finance and Economics, Yang Zhi of Huazhong University of Science and Technology, and Xie En of Tongji University, Professor Yang conducts a study titled Differentiated relational strategies in major supplier networks: A blessing or a curse in collectivist cultures? to examine the impact of favouritism in the supply chain.

Lessons learned from China

The team aims to explore whether the business environment can influence the effects of differentiated relational strategy, and China’s rapidly changing economy provides an ideal environment to study this. Chinese suppliers have seen uncertainties brought by geopolitics and technological turbulence affecting their relationship with buyers.

The researchers conducted a questionnaire survey and follow-up interviews among the management from around 130 manufacturing firms in China. They also obtained the data from the Annual Census Database of Manufacturing Firms of China to measure the company’s actual financial performance.

The research focused on major supplier networks that are highly interdependent, often producing complementary components or outputs for the same buyer. Frequent interactions among these suppliers make each of them aware of its status relative to its peers.

The team’s analysis indicates that companies employing differentiated relational strategies among major suppliers experience poorer financial performance. “A collectivist country emphasises tightly knit relational networks and the equality principle of reward allocation among network members,” Professor Yang says.

Why is equal treatment crucial?

In collectivist societies, group harmony is essential. Playing favourites violates this unspoken rule, and as a result, trust within major supplier networks is likely to be undermined. “Suppliers with relatively weaker relationships with a buyer may lose trust because they feel they are treated unequally,” he adds. “The favoured suppliers may also not fully trust the buyer, worrying that their special status could be at stake at any time.”

Furthermore, the differentiated relational strategy creates invisible divisions, fostering competition rather than collaboration among suppliers. The suppliers become less likely to share sensitive information or work together to solve problems for the buyer.

“Since major suppliers often play complementary roles, this lack of cooperation can lead to production delays, higher costs, and even less innovation, all of which are vital to the buyer,” Professor Yang says.

When favouritism hurts most and least

The researchers delve deeper into the conditions that amplify or moderate the damage caused by favouritism in supplier networks. They find that demand uncertainty and rapid technology change push the impacts of favouritism in opposite directions.

Demand uncertainty refers to fluctuations in how much customers buy. When demand is unpredictable, buyers must frequently revise production plans and place irregular orders. “Demand uncertainty requires buyers to facilitate efficient cooperation within major supplier networks,” Professor Yang says. Under these conditions, favouritism is especially damaging because it limits flexibility in the production lines and makes it harder to mobilise suppliers smoothly.

In contrast, when technology is advancing quickly, favouritism can be less damaging. In fast-moving tech fields, companies often reconfigure their supplier networks and bring in partners with cutting-edge capabilities. Looser ties to existing suppliers can streamline the switch to key partners, helping firms pivot without being held back by prevailing relationships.

Practical takeaways for global supply chains

More and more companies are leveraging algorithms and machine learning to allocate resources. Amid the convenience and speed of the computer brain, Professor Yang underscores the importance of human judgements, particularly since technology may overlook real-world conditions on the ground. “The purchasing managers cannot always rely on technology and may need to step in and incorporate the cultural factor into their decision-making.”

While the differentiated relational strategy may align with individualist cultures, the findings signal that multinational companies should avoid copy-pasting strategies across cultures. What works in individualist markets may backfire in collectivist ones.

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“In collectivist contexts, purchasing managers should avoid a differentiated relational strategy and commit to maintaining equal relational strength with their suppliers,” Professor Yang says. “Transparent and fair practices such as consistent pricing, clear performance metrics and standardised communication may help. This builds trust and reduces administrative workload across the supply chain.”

That said, managers also need to weigh the company’s specific challenges, including demand uncertainty and the need for technological upgrades. If the main challenge is volatile demand, a cohesive supplier network with equal treatment is the greatest asset. If the company is in a race for technological innovation, a more flexible or more differentiated approach might be less harmful.

The post Why playing favourites with suppliers can backfire first appeared on China Business Knowledge.

Featured faculty: Wu Jing
Written by Putro Harnowo

The meeting between Chinese President Xi Jinping and his US counterpart Donald Trump in late October brought a cooling breeze over the simmering trade tensions between the global superpowers. After months of tariff war, which reached 145 per cent at some point, both countries finally struck a deal to de-escalate with a year-long trade truce.

The summit signals a new hope that competition between the world’s two largest economies can be managed without sliding into open conflict. It was a positive development for both after years of deteriorating trade relations, while also giving a well-deserved time for other countries to revisit their supply chain resilience.

“Since 2018, or the onset of the US-China trade war, we have witnessed the global supply chain enter an era of high volatility, although it may have started as early as 2015,” says Wu Jing, Professor in the Department of Decisions, Operations, and Technology at the Chinese University of Hong Kong (CUHK) Business School.

Speaking during the 2025 Global Supply Chains and Logistics Summit organised by the Asian Institute of Supply Chains and Logistics, Professor Wu, who is also an associate director at the institute, delves into strategies for businesses in navigating uncertainty and fragile supply chains.

He explains that before the frictions, the world had seen globalisation peak. Cost optimisation drove companies headquartered in developed economies to move manufacturing activities to emerging markets. This offshoring was particularly popular in the wake of the 2008 financial crisis.

However, global trade started to slow down in 2015, and companies began to relocate back. “In China, the appreciation of the Chinese yuan against the US dollar and increasing labour costs have made the manufacturing cost more expensive,” Professor Wu adds.

The US-China trade war further fuelled the drift as the increasing tariffs and the decoupling risk forced significant manufacturing orders to move outside of China. In 2022, the Russia-Ukraine war and the pandemic brought the trends of nearshoring and friendshoring, where companies relocate operations to nearby or politically aligned jurisdictions to reduce geopolitical risks.

New regulations have also changed the landscape of the traditional supply chain. For instance, the EU Carbon Border Adjustment Mechanism imposes tariffs on imported carbon-intensive products, which, although it sounds good for the planet, has raised concerns among trading partners like the US, China, India, and Brazil.

“The traditional global trade systems are becoming more challenging to solve the current problems,” says Professor Wu. “We probably need to say goodbye to a certain level of trade globalisation and hello to economic regionalisation.”

“The traditional global trade systems are becoming more challenging to solve the current problems. We probably need to say goodbye to a certain level of trade globalisation and hello to economic regionalisation.”

Professor Wu Jing

Restructuring global trade with regionalisation and technology

In a recent interview with Reuters, the director of the World Trade Organisation admitted that only 72 per cent of global trade is now happening under the organisation’s rules, the largest disruption to global trade rules in the past 80 years, and the number could fall further. This means the rest of the cross-border trade currently happens through special agreements between countries.

“We’re seeing a growing number of regional trade agreements, such as the Regional Comprehensive Economic Partnership and the US-Mexico-Canada Agreement, among roughly 400 regional deals covering goods, investment, labour, and technology,” says Professor Wu. “This isn’t an adjustment, but a restructuring.”

In this new trend, regional integration will be crucial in allowing countries to facilitate the flow of trade, capital, energy, people, and ideas. However, global opinions seem to be at a crossroads. The July report from the Pew Research Centre shows that among 28,000 respondents in 24 countries, opinions of the US had worsened, while China is increasingly seen in a more favourable light.

Most of the countries still prioritise the US when it comes to economic ties, but the views among high-income countries have moved in the direction of China. “This opinion storm could shift alliances, trade flows, and investments going forward,” he adds.

As the world shifts from global to regional networks and from cost-cutting to flexibility-first strategies, Professor Wu highlights that supply chain resilience is born from granular data and forged in lightning-fast decisions. Therefore, building supply chains using AI-driven tools and data-powered insights would be a significant advantage, and China may hold a relative advantage in this area.

The UN 2024 Patent Landscape Report shows the country dominates in generative AI patents by filing more than 38,000 patents between 2014 and 2023, surpassing the US as the closest contender with 6,276 patents. Overall, China has been leading in global patent applications by filing 1.64 million applications in 2023, leaving the US as runner-up with 518,364 filings, according to the World Intellectual Property Organisation’s report.

“By transitioning technological capabilities into an AI-driven model and strategically utilising data assets, firms would be able to position themselves to navigate the restructuring of the supply chain,” Professor Wu adds. “The integration of big data and AI will facilitate enhanced adaptability and enable informed, real-time decision-making across logistics operations.”

The post Can AI and regionalisation restructure global trade? first appeared on China Business Knowledge.

Featured faculty: Cen Ling and Wu Jing
Written by Pan Jingyi

In recent years, artificial intelligence (AI) has become a key tool for companies, helping with everything from demand forecasting and procurement to streamlining and optimising processes. For global supply chains that have been under pressure lately due to geopolitical uncertainties, trade conflicts, sanctions, and environmental concerns, AI could be a game changer.

According to a recent EY report, around 40 per cent of supply chain organisations are investing in generative AI for managing knowledge and information. Technologies tend to spread along economic networks, either horizontally among competitors or vertically along the supply chain. However, the diffusion of emerging technologies such as AI remains underexplored.

“We uncover a clear pattern of AI diffusion along supply chains, where AI adoption among downstream sectors leads to subsequent adoption among their upstream suppliers,” says Cen Ling, Associate Professor at the Department of Finance of the Chinese University of Hong Kong (CUHK) Business School.

Downstream industries are those closer to the final stage of production and delivery to end customers, including service and manufacturing sectors, while upstream industries refer to sectors providing raw materials or basic inputs, like mining and agriculture, for downstream industries.

Professor Cen highlights Foxconn, a key supplier for Apple and Nvidia, as a notable example. The rapid AI applications of its major customers have turned Foxconn from a labour-intensive company to one that produces AI-driven electric vehicles and AI servers to house Nvidia chips.

Along with Wu Jing, Associate Professor at the Department of Decisions, Operations and Technology of the School, as well as Han Yanru of Stevens Institute of Technology (A Graduated PhD student of CUHK Business School) and Qiu Jiaping of Shanghai University of Finance and Economics, Professor Cen conducted a study titled Artificial intelligence along the supply chain to delve deeper into critical questions like whether supply chain can serve as a diffusion channel for AI technologies and what economic mechanisms propel this diffusion.

Lead-lag patterns

To measure how American public companies are adopting AI, the team tracked the hiring of AI-skilled employees using data from Revelio Labs, an analytics firm that gathers workforce information from employment platforms like LinkedIn and Indeed, from 2009 to 2019.

The results show a significant increase in AI employees over the past decade, with AI use growing in almost all industries. However, considerable variation exists among various sectors, with downstream industries adopting AI technologies much faster than upstream industries. This is because, Professor Cen explains, downstream companies in the supply-chain data are typically large and reputable industry leaders with direct access to big data of customer profiles.

“We uncover a clear pattern of AI diffusion along supply chains, where AI adoption among downstream sectors leads to subsequent adoption among their upstream suppliers.”

Professor Cen Ling

Further analysis unveils that the increase in AI adoption by main customers precedes and potentially causes an increase in AI adoption among their suppliers in the following year. The researchers call this a “lead-lag” within firm-pair relationships and found that this pattern is not driven by market-wide or industry-specific trends.

In a controlled experiment where the team replaced the suppliers with those who have no prior connections to customers, the results showed that the AI adoption at customer firms does not impact that of suppliers. This suggests the diffusion is indeed driven by firm-to-firm interactions.

Learning and catering mechanism

Suppliers may enhance their AI adoption in response to their primary customers through two key channels: learning and catering. Under the learning scenario, primary customers, often large firms or industry leaders, typically adopt AI technologies before their suppliers, which then absorb and apply these technologies in their operations through routine supply chain interactions.

“Under this mechanism, close strategic relationships with customers equipped with AI technologies reduce suppliers’ costs of learning and adopting AI, which may improve suppliers’ own operational activities and performance,” Professor Cen says.

In the catering scenario, suppliers respond to the needs of major customers who have embraced AI technologies to sustain crucial partnerships. “The effectiveness of the catering channel depends on the relative bargaining power of customers against their suppliers,” he adds. “The learning channel is influenced by the relative size of supply-chain partners, which affects the applicability of the knowledge transferred.”

Based on the collected data, Professor Cen and his collaborators found that the learning mechanism is the primary driver. Suppliers mostly adopt AI to enhance their own capabilities rather than just to cater to customers’ demands.

What makes AI spread faster?

To examine the factors that can affect the suppliers’ learning mechanism, the team examined the employee mobility and geographic distance between customers and suppliers and found that when suppliers hire managers who previously worked for their main customers, the AI adoption is notably higher. Managers normally have a broader view of their company compared to rank-and-file employees, who may lack knowledge of AI advancements unless they work in AI-related roles.

“Our results validate that labour mobility from customers to suppliers, particularly employees with AI-related visions or skills, promotes the AI learning along the supply chain,” Professor Cen adds.

The diffusion of AI technology is also stronger when the geographical distances are shorter. Moreover, when customers relocate farther from suppliers, the suppliers’ AI adoption becomes less influenced by their customers.

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“A shorter distance between supplier and customer facilitates more frequent interactions and leads to faster transfer of knowledge and information,” Professor Cen says, highlighting the crucial role of geographic proximity in stimulating learning.

Positive economic outcomes

Finally, the team examined whether AI diffusion from customers to suppliers actually improves business outcomes. The result confirms that suppliers that have learned AI from their customers are more likely to enhance product quality and manage costs more effectively. More specifically, every standard increase in AI hiring is linked to a 0.74 per cent higher chance of boosting product quality.

As AI continues to spread across industries and borders, understanding how it diffuses along supply chains offers valuable lessons for both business leaders and policymakers.

Professor Cen suggests corporate managers can mitigate risks and maintain competitiveness by tapping into AI knowledge within their supply chain partners. For instance, they can identify the optimal point to acquire such knowledge from trade partners or hire AI experts from these partners.

Compared to traditional technologies, AI requires a significant initial setup cost. However, once established, the ongoing operational costs of using it are comparatively low. Professor Cen argues that government subsidies for downstream customer firms could help kickstart the adoption, “then the positive externalities will diffuse along economic networks to achieve a socially optimal level of AI adoption.”

The post Beyond cargo, supply chain also transfers AI first appeared on China Business Knowledge.

Featured faculty: Zhou Yuqing
Written by Shirley Lau

Most countries rely on the US dollar for trade and finance, making the greenback the preferred currency for international transactions. It might seem obvious that currency fluctuations would affect American companies’ profitability, which would, in turn, affect their share price.

A strong dollar reinforces the US dominance in the global market and helps reduce inflation by making imports cheaper. However, a weak dollar would make American goods more affordable to buy abroad, which could boost domestic manufacturing due to rising demand and, eventually, result in higher revenues and stock prices.

Nevertheless, numerous studies have failed to find a consistent, significant relationship between exchange rate exposure and stock returns. Existing literature has identified meaningful effects only in specific industries or certain companies, while other studies found that exchange rate changes have little to no impact on stock prices. This phenomenon is called “the exchange rate exposure puzzle” and continues to perplex many.

Zhou Yuqing, an Assistant Professor of Accounting at the Chinese University of Hong Kong (CUHK) Business School, highlights a gap in our understanding of the true dynamics of currency movements at play and the importance to revisit the above puzzle.

“The disconnect between what financial theory predicts and what empirical research observes is perhaps surprising, given the sheer importance of international trade and frequent large exchange-rate movements today,” she says. “The phenomenon might be even more perplexing when it comes to publicly listed companies in the US, an economy in which public firms are solidly embedded in the global economy.”

In 2019, exports of goods and services from the US amounted to around 11.7 per cent of its economy, up from 5.6 per cent in 1970. Much of this international trade was conducted by large publicly traded companies. Meanwhile, exchange rates between the US dollar and other currencies experienced great fluctuations over the years. From 1999 to 2019, the euro varied between €0.84 and €1.59 against the US dollar, the Japanese yen between ¥80 and ¥360, and the Chinese yuan between 1.55 and 8.72 yuan.

One may assume that a weak association between exchange rate changes and stock returns is due to financial or operational hedging, which could have mitigated or even eliminated the impact of exchange rate movements. Yet the question remains whether exchange rate exposures are economically meaningful and useful for investors in financial markets.

In a paper titled The effects of exchange rate movements on publicly traded US corporations, Professor Zhou and Ivo Welch of the University of California, Los Angeles, revisited the exchange rate puzzle and finally found strong effects of exchange rate movements on exports, sales, profits and stock prices of publicly listed US companies, and the impact has actually grown stronger over time.

“Larger and more export-oriented firms are likely to engage in more hedging strategies to protect themselves against the risks associated with exchange rate movements.”

Professor Zhou Yuqing

Finding the missing link

Using data from the US Census Bureau’s Longitudinal Foreign Trade Transactions Database, which links individual import and export transactions from 1992 to 2016 to the relevant firms, the researchers were able to focus on firms that were more likely to experience exchange rate fluctuation effects. The data made it possible to generate an independent variable: a firm-specific exchange rate change weighted by the export value, thus further sharpening the focus on the effects of exchange rate movements.

The improved metric enabled the researchers to investigate how US firms involved in export transactions have been affected by exchange rate movements in terms of the size of their exports, sales and profits. The study found a meaningful association between stock prices and exchange rate movements, as well as between firm profitability and exchange rate movements.

By virtue of the improved exchange rate measure, as well as the different types of samples adopted for the study, Professor Zhou first confirmed that there was a significant connection between exchange rate movements and exports. A one per cent change in firm-specific US dollar exchange rate was related to a 0.4 to 0.6 per cent change in exports. After 2004, the coefficients rose to 0.6 per cent. More specifically, it was found that exchange rate movements mainly affected two types of firms: large-sized firms and companies that were already involved in exports in the 1990s.

Next, Professor Zhou revisited the puzzle and found that daily stock returns responded positively to exchange rate changes. A one per cent change in the exchange rate was associated with a 0.06 per cent change in daily stock returns. This relationship has strengthened in recent years. Between 2004 and 2016, a one per cent change in the exchange rate explained a 0.09 per cent change in daily stock returns.

There was also a strong connection between firm profitability and the exchange rate, with a 1 per cent change in the exchange rate associated with a 0.33 per cent change. The magnitude of the elasticity was, however, lower for larger firms, suggesting that although firms had not fully hedged out the financial statement effects of exchange-rate movements, larger and more export-oriented firms engaged in relatively more hedging against exchange rate risks.

“Larger firms typically have fixed costs, so changes in sales have a greater impact on their profitability. If sales fluctuate, these fixed costs can significantly impact their profit margins,” Professor Zhou says. “As a result, larger and more export-oriented firms are likely to engage in more hedging strategies to protect themselves against the risks associated with exchange rate movements.”

Exchange rate can affect domestic sales too

Apart from exports, the study identified strong effects of exchange rate changes on firms’ total sales. A one per cent depreciation in the exchange rate increased sales by about 0.27 per cent. Remarkably, total sales, which encompassed both domestic and international transactions, appeared more sensitive to exchange rate changes than exports. This suggests that exchange rate changes can affect not only exports but also domestic competitive dynamics.

The insights of the study may serve as a reference for those involved in financial decision-making and “may help corporate managers, stakeholders like investors, and policymakers to understand and manage exchange-rate risks in an increasingly interconnected global economy,” says Professor Zhou.

The study also indicates that hedging is not an effective factor in mitigating exchange rate effects due to various limitations, Professor Zhou notes. “Some firms are not fully aware of the effects of exchange rate movements. Others may have limited resources to be allocated to hedge exchange rate movements even when they understand the effects.”

“Public firms need to pay more attention to exchange rate movements. They should also improve exchange rate risk management by combining financial and operational hedging strategies,” she adds. “Moreover, firms can conduct analyses to assess their own exchange rate impacts and react accordingly. They need to ensure transparent communication with investors about their exchange rate risk exposure and their mitigation efforts. These steps can help reduce related risks.”

The post How exchange rate fluctuations affect stock prices first appeared on China Business Knowledge.

This article is republished with permission from BusinessThink, the online business journal of UNSW Business School. You may access the original article here.

In today’s increasingly globalised business landscape, understanding what drives successful cross-border acquisitions has become critical for multinational enterprises seeking international expansion. While conventional wisdom often focuses on host country risks and institutional environments, emerging research reveals that a company’s home country institutions play a pivotal role in shaping international acquisition strategies, particularly regarding ownership decisions that can determine long-term success.

Data from fDi Intelligence shows that Chinese firms have started to increase their cross-border acquisitions since 2010 because of China’s “Go Out” policy. After reaching a peak of US$227 billion in 2016, Chinese outbound M&A activity decreased to US$79 billion in 2018 and further declined to US$46 billion in 2020, reflecting changing home-country institutional environments and government policies toward overseas investments. This volatility can be attributed to the implementation of capital controls and scrutiny of overseas investments by regulatory bodies. After years of slowing cross-border investment, China’s cross-border acquisition activities recently show signs of resilience.

A closer examination of recent trends reveals that US outbound M&A deals reached US$439 billion in 2021 and maintained strong momentum through 2022-2023, despite global economic headwinds. The stability of US cross-border acquisition activities, particularly in strategic sectors, such as technology and healthcare, reflected the continued government support for US firms expanding internationally in industries deemed crucial for economic and national interests. This governmental backing has emboldened many US acquirers to pursue higher ownership stakes in their foreign acquisitions because the home country’s political institutions create predictable policy environments.

When Tata Motors acquired Corus Group

The interplay between home country institutions and acquisition strategies is particularly evident when examining emerging market multinationals. One case study that highlights this trend comes from India, where relatively stable political institutions have enabled companies to pursue ambitious international strategies despite economic classification as an emerging market.

When Tata Motors acquired 100 per cent of Anglo-Dutch steel maker Corus Group plc in 2007, the bold move from an Indian company surprised many industry observers. The acquisition represented one of the largest cross-border purchases by an Indian company at that time and demonstrated a level of confidence rarely seen from emerging market firms. While conventional wisdom suggested companies from emerging economies would typically seek partial ownership stakes to mitigate risk, Tata pursued complete ownership.

This confidence stemmed largely from India’s institutional environment. Although classified as an emerging economy, India has developed relatively stable policies that have improved domestic business environments. Well-developed political institutions created constraints on arbitrary government actions, providing Tata with a stable home base from which to launch its ambitious international strategy.

The acquisition was a transformative moment for Tata, instantly making it the fifth-largest steel producer globally. Rather than being distracted by unpredictable policies at home, Tata could focus its resources and managerial attention on addressing the challenges of integrating Corus and managing operations across different markets. The company was able to access skilled talent from India’s growing pool of management professionals, many trained at world-class institutions like the Indian Institutes of Management and Technology, to support the complex integration process.

Home country institutions and multinational acquisition strategies

This example illustrates findings from a comprehensive study published in the Journal of International Business Studies, which examined how a company’s home country’s economic and political institutions affect cross-border acquisition strategies, particularly the level of ownership they pursue in foreign targets.

The research paper, Home country’s economic and political institutions: firms’ ownership decisions in cross-border acquisitions, by Professor Christine Chan from the School of Management and Governance at UNSW Business School, Professor Lei Shi from the School of International Trade and Economics at the University of International Business and Economics, and Professor Jingtao Yi from Renmin Business School at Renmin University of China, challenges conventional thinking about international business strategy.

Most previous research focused on how host country risks influence ownership decisions, with the assumption that companies seek lower ownership stakes when entering riskier foreign markets. Meanwhile, the effect of home country institutions remained largely unexplored.

“Although multinational enterprises are deeply embedded in their home country and institutions play an important role in influencing firms’ ability to deploy strategic resources to succeed in foreign markets, studies have paid less attention to how home countries’ formal institutions influence acquirers’ cross-border acquisition ownership strategies,” the authors note.

The researchers analysed 133,623 cross-border acquisitions between 2000 and 2020, examining data from 72 home countries and 59 host countries. They employed Heckman’s two-stage method to address sample selection bias, recognising that a firm’s ownership decision can only be observed if it enters the host country. This rigorous methodology helped establish a clear connection between home country institutions and acquisition strategies.

Economic institutions and reducing acquisition uncertainty

The study differentiated between two types of home country institutions: economic and political. Economic institutions create structures that determine labour market efficiency and education quality, directly affecting the availability of skilled talent.

Companies engaged in cross-border acquisitions face what researchers call “endogenous uncertainty” – challenges that can partly be resolved through the acquiring company’s actions. One significant challenge involves transferring headquarters resources to foreign target firms and effectively integrating the acquisition.

“Well-developed economic institutions play a market-supporting role by ensuring a continuous supply of well-trained local talent for the labour market,” the researchers explain. “Skilled workers embody the organisational skills and knowledge that enable the flow of information across firms through the mobility of skilled workers in the local market, representing essential human resources for acquirers to determine the share of equity sought in cross-border acquisitions.”

In practical terms, this means companies from countries with strong economic institutions – those with effective education systems and labour markets that produce skilled managers, analysts, lawyers, and technical experts – can more confidently pursue higher ownership stakes in foreign acquisitions. These companies have access to talent capable of managing complex cross-border integration processes.

Political institutions: Creating stability through constraints

The second institutional factor identified was political institutions, which create checks and balances that constrain government actions and policy changes. Companies face “exogenous uncertainty” – challenges that cannot be directly resolved through their actions – when governments unpredictably change policies or apply them unevenly across firms.

“Without the constraints of political institutions in the home country, the government or policymakers can make frequent changes in the rules of the game, resulting in increased exogenous uncertainty,” the authors write. “Firms in a home country with less developed political institutions are likely to be distracted by unpredictable home-country policies and are therefore unable to pay attention to and allocate resources to manage host-country risks.”

When political institutions are well-developed, they constrain arbitrary actions by governments, creating stability that allows companies to focus on managing foreign market challenges rather than being distracted by unpredictable policy changes at home. This enables them to invest more confidently in full acquisitions rather than settling for partial ownership stakes.

The influence of trade relationships on acquisition strategies

The research also revealed that mutual trade dependence between home and host countries significantly affects how companies leverage their home country’s institutional advantages. High levels of trade between countries create information flows that reduce uncertainty for acquiring companies.

“Mutual trade dependence intensifies direct information flows among cross-border trading partners, allowing skilled labour at home to have more information to facilitate the transfer of headquarters resources and reducing endogenous uncertainty for acquirers,” the researchers explain.

Interestingly, while strong trade relationships enhance the positive effects of economic institutions on acquisition strategies, they weaken the influence of political institutions. This occurs because governments are less likely to make arbitrary policy changes when they have strong trade dependencies, making the constraints provided by political institutions less crucial.

Leveraging capabilities to enhance institutional benefits

Companies do not benefit equally from their home country institutions. The study found that firms with diverse experience across industries (economic capabilities) and countries (political capabilities) can better leverage the advantages provided by their home economic and political institutions.

“Acquirers can leverage the economic and political capabilities developed by their foreign affiliates in different industries and different host countries to reap the benefits of their home country’s economic and political institutions; as a result, acquirers are more likely to seek higher equity stakes in foreign target firms,” the authors note.

Practical implications for business leaders and policymakers

For business leaders planning international expansion, this research offers several key insights. First, business leaders can assess the quality of their home country’s economic and political institutions when developing cross-border acquisition strategies. Companies from countries with well-developed educational systems and labour markets can more confidently pursue full acquisitions due to better access to skilled talent for integration.

Second, acquirers can build economic and political capabilities across different industries and countries. By diversifying experience, companies can better leverage home country institutional advantages. As the researchers suggest: “Corporate decision makers should reassess their industry portfolios and geographic footprints to ensure the efficacy of their subsidiaries’ strategy in terms of scope.”

For companies from emerging economies, the research presents an optimistic view. While many emerging markets face institutional challenges, the development levels of economic and political institutions vary significantly. Even in emerging economies, strong political institutions can enable companies to pursue ambitious international acquisition strategies, as demonstrated by Tata’s full acquisition of Corus Group.

Policymakers can support their multinational enterprises by pursuing synchronised institutional development. The research suggests governments should ensure “that the progress of pro-market reforms is synchronised to enable acquirers to reap the benefits of well-developed institutions at home,” while also promoting trade relationships that enhance information flows between countries.

By understanding how home country institutions influence acquisition strategies, both business leaders and policymakers can develop more effective approaches to international expansion, potentially transforming perceived home country disadvantages into strategic advantages in the global marketplace.

The post Why home countries have the advantage in cross-border M&As first appeared on China Business Knowledge.

Featured faculty: Wu Jing
Written by Sally Ho

Following economic sanctions imposed by Western countries on Russia for its invasion of Ukraine in 2022, questions emerged regarding how businesses respond to seismic geopolitical shifts. In these challenging circumstances, neutral countries are often caught in a bind to either comply with or evade the sanctions.

Naturally, questions emerge about the effectiveness of these sanctions and their impact on global supply chains. “Two distinct trade patterns emerged from our initial analysis: Sanctioning countries complied and their exports to Russia decreased, while neutral countries increased their exports to Russia,” says Wu Jing, Associate Professor in the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School.

This divergence drives him to dig deeper with more granular firm-level data. In a paper titled To comply or not to comply: Understanding neutral country supply chain responses to Russian sanctions, Professor Wu and his PhD student Zhi Li, in collaboration with Li Haishi of the University of Hong Kong and his PhD student Wang Yulin, as well as Park Ziho of National Taiwan University, examined two key mechanisms: extraterritorial export sanctions and financial sanctions.

Extraterritorial export sanctions are regulatory measures intended to restrict or prohibit the export of certain products to Russia, even if the goods are produced outside the sanctioning countries. The US spearheaded this initiative with its foreign direct product rules and entity lists, followed by similar measures issued by the EU, the UK, Canada, Australia, Japan, New Zealand, Norway and Switzerland.

Financial sanctions restrict access to the global banking system and trade, such as disconnecting Russian banks from international payment networks Swift and freezing foreign reserves of Russian financial institutions.

Professor Wu and his collaborators found a striking duality in the behaviour of businesses, depending on firm ownership. Multinational enterprises (MNEs) headquartered in sanctioning countries consistently reduced exports of sanctioned products to Russia by 34 per cent more compared to non-sanctioned products. This indicated compliance with extraterritorial sanctions and alignment with geopolitical mandates from their home countries, even when they were operating in neutral countries.

By contrast, domestic firms in major neutral countries like India, Pakistan, Vietnam, and Mexico significantly increased exports of sanctioned goods by 36 per cent. MNEs based in countries that have not imposed sanctions also increased their exports of sanctioned goods, though by a smaller margin of 6 per cent.

“Sanctions design should prioritise the strengthening of secondary sanctions to monitor trade routes and restricted market access to close existing loopholes.”

Professor Wu Jing

Different compliance between multinational and domestic firms

The researchers investigated export flows from firms across various countries and compared these flows before and after the imposition of sanctions. International transaction data was obtained from a supply chain intelligence platform S&P Panjiva, financial information from Orbis, and industry data from various sources. The analysis covered firms that traded with Russia from 2021 to 2023. Sanctioned products were identified using export control lists from the US Bureau of Industry and Security.

The analyses found that neutral countries took the opportunity to expand exports to Russia, thereby not only filling the void left behind by MNEs that abided by sanctions but also decreasing the effectiveness of Western sanctions. While sanctions may increase sourcing costs, Russia can still procure necessary goods from neutral countries, potentially undermining the sanctions’ objectives.

While MNEs based in non-sanctioning countries did increase their exports to Russia after the onset of the war, the analysis showed that domestic firms in neutral countries were the primary drivers of increased exports of sanctioned products to Russia.

A notable example is India’s largest privately owned conglomerate, Reliance Group, which initially only engaged in equipment maintenance and low-end parts supply for small and medium-sized Russian energy enterprises. Since the onset of the sanctions, its market share has jumped, and it has become one of the closest partners of Russian oil companies.

The growth of intermediary companies in Turkey illustrates this pattern well. Azu International, established in March 2022 in Turkey, quickly became a significant player, exporting at least US$20 million worth of computer components to Russia in just seven months.

Using a new decomposition formula, the team concluded that domestic firms contributed 145 per cent of the uptick in sanctioned product exports from non-sanctioning countries to Russia. In comparison, this figure for MNEs headquartered in sanctioning countries stood at a negative 51 per cent, as they decreased exports to sanctioned countries.

Domestic firms as growth drivers

Among domestic firms in neutral countries, consumer markets played a decisive role in shaping compliance behaviour. Firms that exported more to sanctioning countries reduced their exports to Russia due to potential penalties incurred for violating sanctions and the risk of losing access to the target markets. “Since they generate sales and profits in sanctioning countries, penalties against them are more enforceable,” says Professor Wu.

Conversely, firms that sourced inputs from sanctioned countries increased their exports of sanctioned products. “These firms were undeterred by secondary sanctions and likely rerouted imports from sanctioning countries to Russia, boosting their Russian sales,” he adds.

One interesting discovery is the duality in behaviour among MNEs headquartered in sanctioning countries. While it’s no surprise that these MNEs made adjustments to increase exports and seek out new buyers in their fellow sanctioning countries, they also simultaneously expanded exports to Russia-friendly countries.

The study found potential evidence of trade rerouting from MNEs headquartered in sanctioning countries to nations connected with Russia’s banking payment networks and allies, notably other former members of the Soviet Union. The researchers described this approach as one that blended compliance with potential evasion of sanctions.

Meanwhile, the team found that financial sanctions were particularly effective in decreasing imports from Russia by MNEs headquartered in sanctioning countries. This was particularly acute in sectors reliant on trade and finance, such as oil and gas, mining and raw materials, agriculture and food exports.

Implications for policymakers and future research

The study suggests policymakers consider the role of neutral countries to boost the effectiveness of future sanctions. “Our findings underscore the importance of MNEs and the extraterritorial reach of sanctions in geopolitical conflicts beyond the Russia-Ukraine war,” says Professor Wu.

In broad terms, the success of sanctions rests on policymakers’ ability to discourage domestic firms in neutral countries and MNEs based in non-sanctioning countries from trading with sanctioned countries. “Sanctions design should prioritise the strengthening of secondary sanctions to monitor trade routes and restricted market access to close existing loopholes,” he adds.

In the specific case of sanctions against Russia, the paper found that if domestic firms in neutral countries and MNEs based in non-sanctioning countries could comply as much as MNEs headquartered in sanctioning countries, Russia’s total imports of sanctioned products could see a 60 per cent cut and overall imports would fall by 38 per cent.

Looking ahead, Professor Wu notes that there is an opportunity to dive into the longer-term impacts that economic sanctions have. “Future research could explore the overall welfare effects and long-term implications for supply chain restructuring.”

The post Why some firms comply with sanctions but others don’t first appeared on China Business Knowledge.

Featured faculty: Andrew Yuen
Written by Putro Harnowo

Donald Trump has returned to the helm of the world’s largest economy. The 47th president promised to make America great again, and his policies would impact beyond the border. Looking at his first term, which was quite controversial, the world watches whether his new term will lead to disruption or pave the way for unexpected progress.

“When analysing someone’s behaviour through the lens of economic mindset, we shouldn’t listen to what they say but pay attention to their actions and, more importantly, to what they care about,” says Dr. Andrew Yuen, Director of EMBA Programme and Principal Lecturer of Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School. “We are lucky to have a historical record of Trump’s previous term to see what he has done and gain some insight into what he would do.”

In February’s EMBA masterclass titled Navigating uncertainty: Where is Trump leading the US and the world economy? Dr. Yuen suggests that the answer to the topical question can be seen from his most important appointments: the vice president and the secretary of state. Vice President JD Vance has a presiding role in backing up and taking over the role if the president is unable to perform his duties, while the Secretary of State Marco Rubio is the principal advisor in all foreign affairs.

Including Vance and Rubio, the Trump 2.0 administration is manned by those in their mid-40s, while the Trump 1.0 cabinet was filled with older members, including the 59-year-old vice president and 65-year-old secretary of state when elected.

“As Trump now has more experience, he is more confident in leading the team to govern the country,” says Dr. Yuen. “It seems that Trump is looking for something beyond himself and thinking about succession by appointing younger staff and cultivating them to make his legacy sustainable.”

On the other hand, known for his hawkish stance on China, Rubio is currently on the list of sanctions by the Chinese government for his role in proposing and supporting sanctions on China when he was a congressman. “The relationship between China and the US will be challenging in the next few years,” Dr. Yuen adds.

One of the key highlights of Trump’s campaign is his stance on imposing hefty tariffs. After all, it was during his previous term that the trade war against China broke out. During his campaign for the 2024 election, he promised tariffs of as much as 10 per cent on global imports and 60 per cent on Chinese goods, plus a 25 per cent surcharge on Canadian and Mexican products. Many worry that this move will lead to higher prices and, eventually, inflation.

Can tariffs make America great again and again?

“Tariffs could, but not necessarily, lead to inflation,” says Dr. Yuen. In his first term, Trump had increased tariffs yet inflation was mild, around 2 per cent, and even almost dropped to zero in 2020. After Biden became president in 2021, inflation increased to more than 8 per cent before falling to around 3 per cent by the end of 2024, likely due to the pandemic relief and the central bank’s policies, among many other things.

“The basic understanding of inflation is the year-over-year price change. After tariffs are introduced, inflation will only happen in the first year,” he adds. “After the following years, the impact will be diminished as tariffs only have a one-off impact on inflation.”

“It seems that Trump is looking for something beyond himself and thinking about succession by appointing younger staff and cultivating them to make his legacy sustainable.”

Dr. Andrew Yuen

A 2021 academic paper published in American Economic Review analysed the impact of the 20 per cent tariff on consumer inflation in the US and found no significant effect. The study discovered that Chinese manufacturers increased their prices after the tariffs, but American importers did not pass through the costs to their consumers. The US firms lowered the profit margin and practically paid the tariff, cushioning the impact on consumer inflation.

However, inflation could rise due to unprecedented factors. As Trump pledged to deport illegal immigrants, which stood at 8.3 million in 2022 or five per cent of the 170 million US working population, having this significant workforce left will have a negative unemployment rate, where the demand exceeds the supply of labourers. “Consequently, when companies cannot hire people, they need to increase salaries, which would trigger higher inflation,” says Dr. Yuen.

Putting caps on inflation and debt

As inflation rises, the central bank often responds by increasing interest rates to encourage saving, which reduces consumer spending and business investment. Trump has demanded that interest rates drop immediately to drive investment and consumption in January 2025. However, there are clear regulations about how the central bank issues its monetary policy.

The US Federal Open Market Committee decides the interest rate policy, and the president can appoint seven or 60 per cent of its members. Nevertheless, the president cannot replace anyone in the committee or the Federal Reserve Board of Governors unless they resign or retire. “Although Trump wants to lower interest rates, the institutional arrangement forbids him from influencing the central bank,” says Dr. Yuen.

Wasteful spending by the previous administration, as Trump blamed many times, allegedly led to a record high of US$36.22 trillion in outstanding borrowing by the US federal government. “The US has a high 124 per cent debt-to-GDP ratio as of December 2024, while the international benchmark for a healthy level is 90 per cent,” says Dr. Yuen.

Yet, there is much confidence in the US government bonds being not default. Such a faith may also be reasonable as the Wharton School of the University of Pennsylvania analysed that the threshold for the debt-to-GDP ratio to default the government bond is about 200 per cent. “Although the US Government is not likely to go ‘bankrupt’, we need to pay attention to the crowding out effect and US dollar dominance in the global economy.”

In addressing wasteful spending, a celebrated businessman, Elon Musk, was tasked to lead a new Department of Government Efficiency to cut expenditure by US$2 trillion from the US$6.4 trillion federal budget. As a result, the department decided to freeze international aid and dismantle the US Agency for International Development, in addition to laying off tens of thousands of federal workers.

The true face of Trumponomics

Despite the fanfare of the masterplan for a radical reformation, Dr. Yuen sees Trump’s ideas as not new. “In the past, US president Ronald Reagan had his ‘Reaganomics’, or what the economists call the supply-side economics. What Trump is doing with Trumponomics now is exactly what Reagan did before.”

There are four major areas of supply-side economics, Dr. Yuen explains, namely cutting government spending, tax reduction, trickle-down economics, and deregulation. In 2017, Trump signed the Tax Cuts and Jobs Act into law, significantly lowering corporate tax rates from 35 to 21 per cent. The general idea is by lowering taxes, the company will be more profitable and then could pay more profit tax for federal revenue. Trump proposed a further tax reduction of 15 per cent for businesses focused on US-based operations.

Trickle-down economics involves less regulation and tax cuts for those in high-income tax brackets and corporations to make them spend more, trickle down the money to the broader population and stimulate the economy. Unfortunately, many studies and analyses have shown that tax cuts and trickle-down concepts never materialised as intended.

Deregulation is the same song that Trump played in his first term by removing several regulations in finance, environmental protection, and healthcare. A couple of weeks after moving to the White House in January, Trump signed the executive order to withdraw the US from the Paris Climate Agreement.

However, a new pattern emerges. Trump currently aims to eliminate 10 regulations for each new regulation issued, or the so-called 10-to-1 deregulation initiative. This is a dramatic change from his previous 2-for-1 deregulation in his first term. “In the past, Trump’s major objective was to remove old regulations,” Dr. Yuen says. “This time, he wants to minimise the new regulations so that significant changes can be made to the technology and artificial intelligence industries.”

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Keeping the legacy alive

Since the new industries have no regulations to remove, Trump is not intended to over-regulate them. Similar hopes can be seen in digital assets and cryptocurrency. Trump has announced that five digital assets will be included in a new crypto strategic reserve. “Many Bitcoin holders like Trump because he’s a friend of digital currency and is open-minded about the strategic positioning of digital currency at the national level.”

Overall, Dr. Yuen sees that Trump is leaning more toward pro-business, emphasising small government, lower taxes, deregulation, and government downsizing while promoting protectionism through tariffs and immigration control. “The possible impact is a short-term economic boost,” he adds.

“However, deregulation raises concerns about whether the market has enough protection during economic downturns, but if not, it will lead to an economic crisis. This could result in high inflation and high interest rates, as well as deglobalisation and weakening the US dollar’s international status.”

The post Will Trump 2.0 be wiser or stronger? first appeared on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

The ongoing trade disputes between China and the US since 2018 have triggered global supply chain disruptions. In response to the decoupling trend between the world’s two largest economies, many American companies are diverting their supply chains to alternative countries to reduce their reliance on China. Before the trade disputes, China saw its share of US imports peaked at 21.6 per cent in 2017.

This percentage dropped to 13.9 per cent in 2023, the lowest level in two decades. In contrast, over the same period, the US saw significant increases in import shares from third-party countries, such as Vietnam and Mexico.

Global supply chains face growing complexities as companies reassess their strategies in light of the US-China trade war. Businesses grapple with balancing efficiency and risk mitigation while identifying reliable and flexible supplier networks. The global supply chain realignment trend reflects shifting trade flows and evolving competitive dynamics among nations.

“Our findings suggest that suppliers in Vietnam and Mexico cannot fully substitute China in an end-to-end capacity and continue to rely on Chinese inputs, resulting in the maintenance of indirect connections between the US and China.”

Professor Wu Jing

The rapid shifts in the global supply chain have raised questions about whether third-party countries possess the same end-to-end supply chain capabilities as China, or if they are merely replacing China in certain segments of the supply chain while still depending on Chinese inputs. These questions open up the possibility that, despite efforts to reduce its supply chain reliance, Uncle Sam is still closely connected to China through third-party countries.

“We find that US importers’ indirect exposure to China through Vietnam increases by approximately 21 per cent, while through Mexico by about 5.5 per cent following the commencement of the trade war,” says Wu Jing, Associate Professor in the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School.

“These results suggest that rather than being replacements for Chinese suppliers with equivalent end-to-end supply chain capabilities, US suppliers in Vietnam and Mexico may instead be intermediaries who retain a strong reliance on Chinese inputs.”

Along with Vernon Hsu, Choh-Ming Li Professor of Operations Management at the same department and his PhD student Peng Boya, Professor Wu investigated the dynamics of indirect supply chain connections in response to the US-China trade war in a recent research titled The paradox of de-risking: Global supply chain rerouting in response to the US-China trade war.

The increased indirect exposure to China

Researchers observed that suppliers for US companies still rely on inputs from China, illustrating the impact of the US-China trade war on indirect supply chain dependencies. “Despite the apparent trade diversion, China’s well-established supply chains continue to exert a significant influence on US global supply chains, even in the presence of trade barriers,” says Professor Wu.

To get to this conclusion, the team developed a novel measure to assess the indirect exposure to China for American importers. This measure considers two key components: the share of US imports from Vietnam and Mexico, and Vietnam and Mexico’s dependence on inputs from China. Although American companies can import from other markets to replace China, both Vietnam and Mexico have emerged as primary beneficiaries of the recent global supply chain reallocation trends, with strategic locations of sharing borders with the conflicting parties.

The researchers examined publicly listed manufacturing firms in the US that engaged in imports from China between 2013 and 2017 before the trade war,  and also from either Vietnam between 2018 and 2022, or Mexico between 2016 and 2022. They collected the transaction-level global shipping data from Panjiva, as well as firms’ financial statements and broader economic indicators from Compustat and Orbis.

The results showed that US imports from Vietnam and Mexico and both countries’ imports from China increased following the trade war. Specifically, there has been a substantial increase in the imports of inputs from China among Vietnamese suppliers, surpassing the rise in US imports from Vietnam. However, the increase in the US imports from Mexican suppliers slightly exceeds the increase in Mexican imports from China.

Vietnam: A bridge to downstream goods

Both Vietnam and Mexico stand as viable alternatives for US companies seeking new suppliers, but what sets these two nations apart? Delving deeper into this question, Professor Wu and his team thoroughly analysed the channels influencing product rerouting through either Vietnam or Mexico.

Their investigation unveiled the crucial roles of geography and product characteristics in shaping supply chains. Product characteristics refer to whether products are upstream or downstream and the degree of China’s comparative advantage in their production. Upstream products are raw materials, components, and intermediate goods used in early supply chain stages to create downstream products or finished goods ready for sale.

The results indicated that more downstream goods and products for which China has a greater comparative advantage experience a more significant increase in indirect exposure via Vietnam, particularly in the textile, footwear, and electrical industries.

“China leverages Vietnam as a bridge to continue exporting products that are more downstream—products that typically involve more labour-intensive final assembly and for which it retains a significant comparative advantage,” Professor Wu says. “Vietnam’s proximity to China and comparable cost-effective production capabilities facilitate its smooth integration into Chinese supply chains.”

For instance, the researchers found that Nike witnessed a 153 per cent increase in indirect exposure to China through Vietnam for textile and footwear products after the trade war, but the company seldom imports from Mexico.

Mexico’s advantage in upstream products

Upstream products, particularly in the chemicals, plastics or rubbers, metals, and machinery industries, showed a notable increase in indirect exposure through Mexico. “These upstream products are typically imported into the US to be further integrated into products that are higher-value-added, which require greater supply chain responsiveness for which Mexico’s close proximity to the US is a major advantage,” Professor Wu explains.

Professor Wu further notes that their empirical evidence supports the strategies adopted by American firms in response to the trade disputes.

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For example, 3M saw a 20 per cent increase in indirect exposure through Mexico for chemicals, plastics and rubber products and a 47 per cent increase for machinery products. Power management company Eaton’s indirect exposure via Mexico increased by 123 per cent for chemicals, plastics and rubber products, and by 94 per cent for metals products. Both companies have limited interaction with Vietnam.

Reviewing reliance beyond primary suppliers

The study underscores the necessity for reassessing global supply chain risks and dependencies. “It is important to consider sub-tier supply network structures in managing supply chain risks,” says Professor Wu. To fortify supply chains, he recommends that companies review dependencies beyond primary suppliers and proactively assess their supply network’s exposure to key markets.

Moreover, while the US-China trade war has posed challenges for Chinese firms, the researchers note that companies can still capitalise on the third-party countries’ markets as China’s role in the global supply chain remains difficult to fully replace. “Our findings suggest that suppliers in Vietnam and Mexico cannot fully substitute China in an end-to-end capacity and continue to rely on Chinese inputs, resulting in the maintenance of indirect connections between the US and China,” Professor Wu concludes.

The post Supply chains find new routes amid trade war first appeared on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

As part of the world’s second-largest economy, Chinese enterprises have become increasingly important in global business and are actively expanding their digital outreach. According to the latest report by the National Data Administration, core industries in China’s digital economy contributed 10 per cent to the country’s GDP in 2023.

Chinese multinational enterprises (MNEs), including tech giants Huawei, Tencent, and Xiaomi are also advancing globally. For instance, Tencent Cloud has seen double-digit growth in international business over the past three years, excelling in Southeast Asia, Japan, the Middle East, and Europe. Thus, it is imperative for MNE managers to prioritise their digital strategies to maximise benefits while minimising costs.

“The overall time and efforts MNEs invest in developing and operating digital platforms impact their international sales in this fast-moving global technological era,” says Li Jingyu, Assistant Professor of the Department of Management at the Chinese University of Hong Kong (CUHK) Business School.

In collaborative research, Professor Li delved into the impact of managerial attention on digital platforms on international sales. The study titled Digital platform attention and international sales: An attention-based view was co-authored with Pan Yigang of York University, Caleb Tse of Nanyang Technological University, and Yang Yi of Shanghai Jiao Tong University.

Digital platform attention refers to the overall focus, effort, and resources that MNEs allocate to managing and optimising their digital platforms. It is a concept derived from the attention-based view theory, which emphasises the significance of managerial attention in influencing firm performance.

“MNEs with more intensive and persistent digital platform attention are more effective in reaching global customers and achieving better international sales, but MNEs with a more diversified or scattered scope suffer from constrained international sales,” says Professor Li.

Three dimensions of digital platform attention

In this research, the team explored how three dimensions of digital platform attention, including intensity, persistence, and scope, affect MNEs’ international sales. Intensity reflects the total managerial attention devoted to digital platforms, while persistence indicates the consistent focus that managers and decision-makers maintain on digital platforms over time. The scope refers to how many kinds of platforms managers focus on.

“Persistent managerial attention to digital platforms over time enables managers to spot opportunities, limitations, and problems.”

Professor Li Jingyu

The researchers analysed multinational enterprises in the China Stock Market and Accounting Research database from 2013 to 2018, when China’s digital platforms grew rapidly. They identified digital platform attention by extracting sentences with keywords related to digital features in companies’ annual reports, such as “platform,” “digital,” “online,” and “internet.” In total, they scrutinised 2,423 sentences from their sample of 784 Chinese MNEs.

The intensity of digital platform attention was measured by counting the number of sentences with digital keywords in the annual report, while the persistence of this attention was assessed based on the frequency of these mentions over a three-year span. Furthermore, the scope of attention was evaluated by categorising the types of digital platforms companies focused on.

Intensity and persistence are valuable

The results confirmed that MNEs with a higher intensity of digital platform attention have more international sales. A higher level of concentration on digital platforms compels managers to acquire profound insights for improving these platforms effectively, enabling companies to address issues with ample resources and enhance stakeholder engagement.

“As a result, problems and potential issues associated with the digital platform will be identified in a timely manner,” Professor Li says. “It can help organisations maintain good relations with their existing customers and identify potential new customers to achieve more sales.”

Likewise, MNEs with higher persistence of digital platform attention, reflecting their consistent focus, also demonstrate higher levels of international sales. “Persistent managerial attention to digital platforms over time enables managers to spot opportunities, limitations, and problems,” Professor Li explains, adding that consistent attention allows stakeholders to establish specialised routines and procedures, which can enhance communication with global partners and customers.

Contrary to the intensity and persistence, MNEs with a wider scope of attention have fewer international sales. Professor Li attributed this to the potential distraction stemming from a broader scope. “When MNEs divide their managerial attention across a diverse array of digital platforms, they likely experience information overload, which in turn may prevent them from realising the full benefits of those platforms,” she says.

The influence of geographical distance

MNEs may establish subsidiaries in remote areas to capitalise on opportunities like market expansion, cost efficiency, and government incentives. However, the geographical distance can create significant communication challenges and may influence the degree of focus companies allocate to their digital platform engagement. Consequently, MNEs need to pay more attention to effectively solving operational issues.

“When limited managerial attention has been resituated to remote subsidiaries, the focus on digital platforms may be reduced,” says Professor Li. “As a result, managers may neglect some details in improving their digital platforms.”

As anticipated, the team found that remote geographical distance weakens the positive impact of intense digital platform attention. However, the findings revealed that the impact on persistent attention remains unaffected. Professor Li notes that consistent focus on digital platforms can help companies establish stable routines, so digital platform-related operations can remain steady even when the managerial attention is distracted. “Some managerial attention can be released from digital platforms and redirected to remote subsidiaries and other operational issues to help promote international sales,” she adds.

Remote subsidiaries narrow digital platform focus

Managers may struggle to spread their attention across various digital platforms and remotely located subsidiaries simultaneously. Remote subsidiaries would force managers to focus on fewer types of platforms.

As a result, the negative impact of a wide scope of digital platform attention can be attenuated by remote geographical distance between headquarters and subsidiaries. While having a wide scope of digital platform attention can create challenges, the distance between headquarters and subsidiaries can help alleviate some of these issues by encouraging a more focused approach to platform management. Managers can address the needs of the platforms they focus on, and improvements will occur.

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“We suggest that top managers of MNEs should pay intensive, persistent, and focused attention to digital platforms when trying to sell more internationally, but be cautious about spreading managers’ attention across diverse platforms,” says Professor Li.

However, she notes that this study exclusively examined listed MNEs in China, suggesting that unlisted MNEs within China and MNEs from other markets could possess unique characteristics. “Future research can extend this study by exploring the relationship between digital platform attention and internationalisation in various types of MNEs.”

The post What should multinationals do to win the digital race? first appeared on China Business Knowledge.