Global Value Chains and Political Tension: The Case of Korean Firms

Abstract Conflicts between the US and China have significant consequences for Global Value Chains (GVCs) by causing greater uncertainties and disruptions in supply chains. This study examines the causal relationship between political conflicts between the US and China and the level of investment of Korean firms involved in GVCs from 2008 to 2021 using data at the firm level in the manufacturing sector. In particular, we examine the investment of firms that transition from being non-GVC participants to GVC participants. The findings indicate that political tensions between the US and China cause increased investment for GVC firms relative to non-GVC firms. However, firms that switch to exporting or importing exclusively undergo a reduction in their levels of investment. These results suggest that political tensions without violence can negatively affect Korean firms, with the effects varying depending on the firms’ GVC status.