EXPRESS: Benefits of Extreme Political Stability and Instability of Supplier Countries for Firms: The U-Shaped Relationship

Using a large-scale panel dataset of U.S. buyer firms and their global supplier networks from 2010 to 2020, we examine how global political instability (GPI), a firm’s weighted exposure to political instability across the countries where its international suppliers operate, is associated with firm performance. We find a U-shaped relationship: buyer firm performance is highest when a firm's overall sourcing exposure reflects either very low or very high levels of GPI. At the low-GPI end, the results align with transaction-cost economics (TCE), as political stability is associated with lower uncertainty and fewer coordination frictions. At the very high-GPI end, we identify bargaining power as a key mechanism: buyers exposed to politically unstable supplier countries exhibit greater bargaining power and more favorable contractual terms, particularly favorable trade credit, which may partially offset the costs of political instability. We further show that this nonlinear relationship varies across industries. It is more pronounced in productive industries, where buyers have greater bargaining power to negotiate favorable trade credit and lower switching costs to reallocate sourcing during periods of political instability. However, it is flatter in durable-goods industries, where asset specificity and higher switching costs are associated with weaker bargaining power and a more limited ability to secure favorable trade credit from suppliers in politically unstable countries. Finally, we document an important managerial trade-off: while higher exposure to unstable supplier countries is associated with improved performance, it is also associated with more negative media coverage related to supply chain issues and ethical risks. Our results remain robust across multiple complementary identification strategies, strengthening confidence that the documented nonlinear effect and its underlying mechanism are not driven by spurious correlations or a single empirical approach.