The fragmentation of political risk and MNCs' supply chain linkages

Abstract

Political science research devotes considerable attention to the impact of political risk on multinational companies' (MNCs') behavior. However, this body of research suffers from two main oversights: (1) a disproportionate focus on MNCs' investment decisions, and (2) an assumption that political risk takes a common, centralized form across countries. In this dissertation, I redirect, attention to the political determinants of MNCs' supply chain linkages. I argue that these linkages represent a risk-mitigating strategy for MNCs, and one that is particularly well suited for dealing with environments where the sources of political risk are spread throughout the state apparatus -- which I refer to as fragmented political risk. To test this theory, I draw on both cross-sectional survey data of MNCs in Sub-Saharan Africa and firm-level panel data from Indonesia -- a country that experienced a profound fragmentation in the structure of political risk. The principal finding of this research is that fragmented political risk causes MNCs to increase their use of local suppliers, with particularly strong effects among those that are (1) more vulnerable to political risk, and (2) have a greater capacity to adopt linkages, in general. These findings qualify research on the political determinants of FDI by showing that MNCs, and not merely states, are capable of resolving political risk in the host country.