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E-MailAriel Rava is a Post-Doctoral Fellow at Harvard Law School’s Program on Corporate Governance, Musa Subasi is an Assistant Professor of Accounting and Information Assurance at the University of Maryland, and Rohan D’Lima is an Assistant Professor of Supply Chain Management at Oregon State University. This post is based on their recent paper.
International trade relies on a complex network of supply chain relationships, which involve navigating various political, legal, and regulatory environments across different countries. Efficient global supply chains require stable and predictable operations in each participating country; however, local government policies can introduce significant uncertainty to the business environment, affecting supply chains across these countries. For example, sudden increases in economic policy uncertainty (EPU) precede declines in investment, productivity, and employment. Furthermore, a change in a country’s EPU can result in a reduction in its exports, subsequently disrupting the operations of firms sourcing from that country.
In this study we investigate the role of foreign national directors in mitigating the adverse effects of supply chain disruptions caused by spikes in economic policy uncertainty (EPU) in their home countries.
The impact of foreign national directors on corporate boards continues to be a subject of ongoing debate. Foreign directors can potentially help reduce their firms’ exposure to EPU induced supply chain disruptions in their home countries for several reasons. Foreign national directors possess unique informational advantages pertaining to their home countries, including language proficiency, cultural knowledge, institutional understanding, and social connections, while staying attuned to news and political developments. However, certain factors could counterbalance the potential benefits that foreign directors offer. These include a lack of adequate information about the firms they serve, coordination costs, limited familiarity with buyer country (US) accounting rules, laws, regulations, governance standards, and management practices, and language and cultural differences that can impede communication and coordination among board members. Our research adds context to this debate by examining whether foreign national directors who serve on the boards of US manufacturing firms can alleviate the impact on these firms of supply chain disruptions triggered by EPU spikes in the foreign nationals’ home countries.
Using a comprehensive dataset of US manufacturing firms’ global supply chain relationships from 2003 to 2019, we demonstrate that firm-exogenous shocks in a supplier country’s EPU propagate through the supply chain, resulting in significantly reduced sales, lowered firm value, and diminished purchases for the supplier’s US buyers. Specifically, an EPU spike in a supplier country correlates with a 1.8% decrease in US buyer firm sales and a 2.7% decrease in US buyer firm value, both economically and statistically significant. However, we also observe that these negative effects are mitigated when the buyer has a foreign national from the country experiencing the EPU spike on its board of directors in the quarter prior to the spike.
In our cross-sectional analyses, we find that the impact of foreign national directors in mitigating the adverse consequences of EPU-induced supply chain disruptions is more pronounced for firms that are highly leveraged, financially distressed, and have lower cash holdings. These findings align with our hypothesis that foreign directors will have a more significant impact on financially constrained firms that often have fewer resources and less bargaining power to buffer themselves from supply uncertainty. Therefore, these firms rely on the informational advantages provided by the foreign director. Taken together, the results of our cross-sectional tests support the contingency view of firm ties, suggesting that the effectiveness of foreign national directors in mitigating supply chain disruptions depends on the extent to which a firm relies on these ties to ensure the flow of resources through its supply chain.
Collectively, our findings underscore the importance of having foreign national directors on corporate boards during periods of heightened global economic policy uncertainty, particularly for firms that heavily rely on foreign suppliers. These results contribute to the ongoing debate on the advantages of board diversity and the resilience of global supply chains in the face of policy driven uncertainties.
Our contributions to prior research are twofold. First, we build upon existing work that examines the effects of economic policy uncertainty spikes in supplier countries and their propagation through the global supply chain network. We contribute to this research stream by demonstrating that the inclusion of foreign national directors from countries that experience a surge in EPU helps mitigate the adverse effects of supply chain disruptions triggered by these EPU spikes. Additionally, our results highlight the crucial role of foreign directors in assisting lowresource firms and financially distressed firms in alleviating the impact of EPU-induced global supply chain disruptions. To the best of our knowledge, no prior study has examined this specific role. Second, we contribute to the broader research on corporate board diversity and, more specifically, to the research on the role of foreign national directors in corporate governance. Our paper suggests that the value of foreign nationals as corporate board members is more nuanced than was previously thought. While several studies raise concerns about the value of foreign nationals, our findings show that foreign directors are more likely to have a positive effect in an international trade setting, where they provide informational advantages. Our results highlight the value of leveraging foreign nationals to establish connections with supplier countries, which can be particularly significant during turbulent times.
