Outward Foreign Direct Investment and Supply Chain Concentration: Evidence from China

Abstract

The potential risks arising from excessive supply chain concentration have received more and more attention. In practice, high supply chain concentration hinders firms’ sustainable development, especially for firms in emerging markets. However, how to reduce supply chain concentration remains an underexplored problem. Outward foreign direct investment (OFDI) has been an important strategy for firms to reallocate and optimize their supply chain relationships. Thus, we tried to explore whether OFDI can serve as an effective method to reduce supply chain concentration by analyzing their relationship. Using the data of Chinese A-share listed firms from 2008 to 2022, this paper empirically examines the impact of OFDI on supply chain concentration through a two-way fixed-effects model. We find that OFDI significantly reduces supply chain concentration, and this conclusion still holds after using alternative measures of the independent variable and dependent variable, endogeneity treatment, the Heckman two-stage model test, controlling for provincial factors, and excluding special samples. Channel analysis reveals that OFDI reduces supply chain concentration mainly through increasing market share, enhancing innovation capacity, and improving reputation. Cross-sectional analysis shows that the negative effect of OFDI on supply chain concentration is more pronounced in state-owned firms, firms under high industry competition, and high-tech firms. Our findings have important implications for firms to build sustainable supply chain relationships and strengthen supply chain resilience, and for policymakers to guide OFDI reasonably. Future research could further explore the effect of firms’ investment decisions on supply chain configuration.