(iPoster) Navigating Sanctions: A Resource-Based Perspective on Firm-Level Responses

• In Event: Poster Session: International Political Economy I & Perspectives on Canadian Foreign Policy
  In Poster Session: Poster Session: International Political Economy I

Abstract

How do targeted firms strategically respond to sanctions? This article examines the strategies adopted by firms placed on the US Entity List and explores why certain firms choose specific approaches. Once added to the Entity List, US firms are prohibited from selling to sanctioned entities entirely or requiring a government license. As a result, sanctioned firms face two major challenges: disrupted production and setbacks in innovation.

According to the resource-based approach, I propose that a firm’s liquidity and technological advancement significantly influence its strategic choices after being added to the Entity List. Firms with high liquidity and advanced technological capabilities are more likely to invest in developing in-house technology to achieve innovative self-sufficiency. In contrast, firms with high liquidity but limited technological advancement often prioritize foreign direct investment (FDI) to gain quicker access to critical technologies and facilitate technology transfers. Third, firms with low liquidity and advanced technological capabilities typically resort to stockpiling critical inputs. Last, firms with low liquidity and limited technological advancement are less likely to undertake significant strategic changes. Instead, they focus on maintaining their existing cash flow to manage uncertainties and ensure survival during periods of heightened instability.

Furthermore, I argue that sanction severity and the characteristics of US suppliers moderate the relationship between firm attributes and the strategies adopted by sanctioned firms. Different levels of restrictions in the Entity List shape firms’ expectations about the impact of sanctions and influence their strategic responses accordingly. Additionally, the degree of reliance on US suppliers and the characteristics of these suppliers determine the specific challenges faced by each sanctioned firm and further shape their strategic decisions.

For the empirical analysis, this paper analyzes publicly traded firms added to the US Entity List between 2005 and 2023, alongside their domestic peers in the year before their inclusion. Using a staggered difference-in-differences estimation, I examine the relationship between sanction severity, US suppliers' characteristics, sanctioned firms' attributes, and response strategies. Preliminary findings indicate that these factors collectively shape firms' strategies in response to being added to the Entity List.

Analyzing how targeted firms respond to sanctions provides valuable insights into the effects and effectiveness of sanctions. Firms’ responses directly influence their ability to withstand sanctions, shaping the overall impact. This analysis helps assess whether sanctions achieve their intended objectives or lead to unintended outcomes, such as encouraging firm-level self-innovation. Additionally, understanding why certain types of firms adopt specific strategies offers practical guidance for firms to respond effectively based on their attributes. It also enables governments to design and implement future policies that account for firms’ adaptive behaviors.

Author

• Kexin Bai, Texas A&M University