A recent study examining multinational corporations suggests that rising geopolitical risk is prompting companies to diversify their supply chains rather than fully relocate production or bring operations back home.
Using firm-level data from Japanese multinational corporations operating between 2009 and 2022, researchers found that companies respond to increased geopolitical uncertainty by expanding production and sourcing into Southeast Asian economies, particularly ASEAN countries. The findings indicate a shift toward regional diversification as a strategy to strengthen supply chain resilience.
Background on Geopolitical Risk and Global Trade
Geopolitical tensions have increasingly influenced global economic policymaking, leading governments and businesses to reassess production locations, sourcing strategies, and investment decisions. Prior research has shown that geopolitical shocks can have measurable macroeconomic and financial effects, and that major disruptions may encourage firms to reorganize supply chains to reduce future risk exposure.
However, while earlier studies focused on broader economic impacts, recent research examines how firms adjust at the micro level.
Firm-Level Exposure and Supply Chain Adjustment
The study analyzed parent–affiliate data on capital investment, trade flows, and foreign direct investment (FDI) to measure firm-specific exposure to geopolitical risk. Exposure was assessed based on two primary channels: reliance on imported inputs from China and the presence of production or sales activities through Chinese affiliates.
Results show that firms more heavily exposed to these channels are more likely to diversify their supply chains when geopolitical risk increases. This includes adding new import sources outside China and establishing new manufacturing affiliates in ASEAN countries.
The data indicate that diversification is economically significant. A one-standard-deviation increase in geopolitical risk exposure was associated with a measurable rise in the probability of import diversification, representing a substantial share of the average diversification rate observed in the sample.
Diversification Rather Than Full Relocation
Despite increased diversification, the study found limited evidence of large-scale relocation or decoupling. Firms did not systematically withdraw from China by closing affiliates and shifting production entirely to Southeast Asia. Nor did they significantly reallocate capital expenditures on a wholesale basis.
Researchers suggest that relocation involves substantial costs, including sunk investments, established supplier networks, skilled labor, and infrastructure advantages. These factors make full withdrawal less attractive compared to incremental diversification.
Instead, companies appear to adopt a “China plus one” strategy—maintaining existing operations while building additional capacity in other regions to reduce concentrated exposure.
Regional Investment Trends
The study also found that geopolitical risk is associated with increased new investment in Southeast Asia, particularly among firms with greater exposure to China. Adjustment tends to occur through expansion into new markets rather than divestment from existing ones.
There was little evidence that firms increased exit rates from Chinese operations in response to rising geopolitical uncertainty. In contrast, new affiliate entries in Southeast Asia increased among exposed firms.
Reshoring Patterns
Regarding reshoring—bringing production back to the home country—the evidence was mixed. The study found limited large-scale production reshoring. However, some increase in domestic investment was observed among firms heavily exposed to Chinese markets. This suggests that strengthening domestic capabilities may complement, rather than replace, international diversification.
Policy Implications
The findings highlight several implications for policymakers and businesses:
- Supply chain resilience does not necessarily require full reshoring. Diversification can reduce risk while preserving efficiency.
- Southeast Asia is playing a growing role in global production networks.
- Companies respond differently depending on their level of exposure, suggesting that policy approaches may need to account for firm-specific circumstances.
- Global supply chain adjustments appear gradual rather than abrupt, indicating a slow reconfiguration of trade patterns rather than immediate fragmentation.
Overall, the research suggests that global supply chains are evolving toward more regionally diversified networks, balancing efficiency with resilience in response to geopolitical uncertainty.
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