International Connectedness, Governmental Interventions, and Firms' Adaptation to Exogenous Shocks: Evidence from the COVID-19 Pandemic

Abstract

Our understanding of how firms adapt to exogenous shocks remains limited. Drawing on organizational ecology, we theorize that internationally connected firms (i.e., firms that rely on exporting, global value chains and foreign ownership) are less likely to adjust their production in response to a major exogenous shock. Moreover, we posit that governmental policy interventions will have smaller effects on internationally connected firms than on their domestically focused counterparts. To test these assertions, we employ a dataset of more than 13,000 firms from 41 countries worldwide, taking advantage of the recent COVID-19 pandemic as a quasi-experimental setting for this research. Our results support that exportintensive and foreign-owned firms are less likely to adjust their production in response to the pandemic. In turn, we find strong evidence that governmental policies (in the form of confinement stringency and economic stimuli) affect equally all firms' ability to adapt to the pandemic. Finally, the economic magnitude of these policies dwarfs those of firms' international strategies, confirming the paramount role played by governments worldwide in response to major exogenous shocks.

Keywords: Organizational adaptation, Crises, Exports, MNEs, Global Value Chains, Government responses