Impact of Industrial and Geographical Concentrations of Upstream Industries on Firm Performance During COVID-19

Using a large sample of supplier–firm relationships, we develop new measures to operationalize the industrial and geographical concentrations of firms’ upstream industries. The developed measures show an upstream industry might be competitive and contain many suppliers (low industrial concentration) and yet be concentrated in a few countries (high geopolitical concentration) or a small geographical area (high geographical concentration), thus leaving the downstream firm vulnerable to geographical or geopolitical disruptions. Using COVID-19 as an exogenous shock, we document that the firms whose upstream suppliers are operating in industries that have high concentration (either geographically or geopolitically), on average, experienced a reduction of 250 million US dollars in quarterly sales. Thus, competitive industries with ample suppliers may still impose significant risks on downstream firms if the upstream suppliers’ industries are concentrated mainly in a few countries or small geographical areas. Noteworthy, we find evidence that the link between upstream suppliers’ industry-level concentrations and downstream firms’ sales growth is heterogeneous. Specifically, firms can mitigate the negative relationship by adjusting their supply chain networks. The negative relationship is weaker for firms with a geopolitically diversified supply base and firms with more domestic suppliers. Our estimates are robust and consistently identified through several different empirical strategies. Our findings help policymakers and managers to systematically identify locations in supply networks that have the potential to create bottlenecks that may even threaten national security. Additionally, the proposed measures give policymakers insights into which industries to support for onshoring.