Do Supply Chain Managers Make the Right Move in Response to Heightened Domestic and Upstream Policy Uncertainty?

This study examines how firms adjust their sourcing decisions due to variations in policy uncertainty and if such adjustments result in performance effects. Specifically, we assess how policy uncertainty influences a focal firm’s decisions to restructure its supply chain along two dimensions: (a) onshoring/offshoring and (b) geopolitical diversification/concentration. The empirical evidence suggests that managers decrease the ratio of onshore suppliers and diversify their supply base geopolitically in response to heightened upstream policy uncertainty affecting the suppliers. However, we do not find evidence of the influence of domestic policy uncertainty on the focal firm’s decision to adjust the structure of its supply base. To provide actionable advice for mitigating adverse effects resulting from policy uncertainty, we also conduct a post-hoc analysis linking supply chain structure to focal firms’ performance. Our results indicate that, consistent with transaction cost economics, firms with more suppliers onshore and a geopolitically concentrated supply base demonstrate superior performance when their suppliers are exposed to heightened policy uncertainty. As such, our investigation reveals that the managerial response of increasing offshoring and diversifying supply bases may be counterproductive. The estimates are robust and identified through several empirical methodologies.