Does international supply shock necessitate supply chain diversification? Evidence from China’s imports of intermediate goods

This paper examines the impact of international intermediate input supply shocks on firms’ supply chain diversification and its adjustment direction. Using Chinese firm-level customs data from 2009 to 2016, we find a significant U-shaped relationship between supply shocks and supply chain diversification. When shocks are relatively weak, firms tend to maintain concentrated supply chains due to cost and efficiency considerations. Once shocks exceed a certain threshold, firms increase diversification to mitigate risks. Further analysis shows that firms adjust not only the degree but also the direction of supply chain diversification. In response to supply shocks, firms shift from efficiency-oriented to security-oriented sourcing strategies, increasing imports from countries with regional trade agreements, Belt and Road participation, and lower geopolitical risks, while reducing dependence on politically distant or disaster-prone regions. This paper reveals the dynamic trade-off underlying firms’ supply chain decisions and provides micro-level evidence for understanding how firms in emerging economies respond to global supply disruptions.