MNE retrenchment and redeployment in the face of the US –China trade war: Real options and strategic flexibility
US MNEs scaled down Chinese operations and scaled up surrogate nations during the trade war, using subsidiary networks as real options.
Summary
The study shows that US multinationals exposed to tariff escalation in the US-China trade war scaled down their operations in China and scaled up in surrogate countries. The shift was stronger when the firm had alternative subsidiaries it could redirect activity to, when it had more exposure through exports affected by the trade war, when it held majority control of the Chinese unit, and when production was labour-intensive. The authors read this through real options theory: a network of subsidiaries gives a firm the flexibility to retrench in one place and redeploy in another as conditions change.
Editor's opinion
A spread-out network of subsidiaries is a real hedge against geopolitical shocks: firms that had somewhere else to go moved activity out of China and into substitute countries as tariffs rose, and did so most where control and production type made moving easy. Companies that want the same flexibility need to build the alternative sites and the control rights before the shock, since options that do not exist cannot be exercised.
Key concepts
trade war · retrenchment · redeployment · real options · subsidiary network