Abstract How does political tension influence the trade strategies of multinational corporations (MNCs)? Existing literature offers inconclusive evidence and tends to overlook firm-level dynamics. This paper examines two key firm-level linkages to adversarial regions: supply chain connectedness and investment origins. We argue that political tension prompts firms to adopt de-risking strategies to mitigate supply chain uncertainties, whereas home connections dampen such adjustments. Using detailed transactional records and investment origin data, we analyze the 2002 political tension between mainland China and Taiwan through the behavior of MNCs operating in mainland China. Synthetic control and difference-in-differences estimations reveal that political tension resulted in an 8 percent relative reduction in MNCs’ imports from Taiwan, despite overall growth. This effect is most pronounced among MNCs that are heavily reliant on Taiwanese suppliers, maintain less diversified supply chains, and trade in final goods rather than engage in processing activities. Despite their politically sensitive origins, Taiwan-invested firms appear less affected than non-Taiwan-invested firms.
Kong et al. (Wed,) studied this question.