Diversify or Concentrate? Supply Chain Responses to Policy Uncertainty

Abstract

This study examines how firms adjust their sourcing decisions due to variations in policy uncertainty. Some studies recommend diversification to manage uncertainty, whereas others argue it complicates supply chains and favors onshoring instead. The theoretical ambiguity surrounding appropriate responses to domestic and upstream policy uncertainty necessitates empirical investigation. Therefore, the study assesses how domestic and upstream policy uncertainty influences a focal firm's decisions to restructure its supply chain along two dimensions: (a) onshoring/offshoring and (b) geographical diversification/concentration. The study's empirical evidence suggests that managers decrease the ratio of onshore suppliers and diversify their supply base geographically in response to heightened upstream policy uncertainty affecting suppliers. Although domestic policy uncertainty does not significantly affect firms' decisions to adjust their supply base structure, a post hoc analysis reveals that firms are likely to bring suppliers onshore when domestic policy uncertainty is very low. The study also documents that firms are more sensitive to upstream policy uncertainty than to domestic policy uncertainty. Upstream policy uncertainty, rather than domestic uncertainty, is the primary driver of adjustments to supply chain structure.