Rethinking sourcing strategies can mitigate operational risks posed by growing ideological differences.
The global political landscape has transformed dramatically over the past year. Donald Trump’s reelection as US President aside, in Japan, Prime Minister Shigeru Ishiba leads a fragile minority government after an electoral setback; South Korea faces an unprecedented crisis with the impeachment of President Yoon Suk Yeol; tensions between Taiwan and China have heightened since the election of pro-independence Lai Ching-te; and in Indonesia, nationalism is set to grow under the presidency of Prabowo Subianto.
Completing this picture of global political upheaval is the European Parliament’s rightward shift and, of course, Trump’s return to power with renewed “America First” policies. His threat to slap tariffs on all goods imported into the US offers a taste of what’s to come. Interestingly, in the realm of business, a different shift has been underway: American corporations are moving from conservative to moderate positions on social and environmental issues.
Against this backdrop, business leaders must understand how shifting political ideologies shape sourcing decisions. A new study I co-authored* suggests that companies see growing ideological differences with foreign governments as a sign of potential operational risks, from regulatory uncertainty to coordination challenges. On average, companies reduce sourcing by around 10 percent from countries that become more ideologically different after an election.
Case in point: The 2018 election of far-right politician Jair Bolsonaro as Brazil’s president prompted many US companies to significantly reduce their Brazilian imports.
Why firms bail
Our analysis of data on 1,500 US companies and 150 elections around the world between 2007 and 2022 identified three fundamental factors that determine how ideological shifts affect supply chains.
First is the strength of local institutions. In general, strong institutions enable effective policy implementation. This means ideological differences are likely to have greater business impact in countries with strong rule of law. We found that when companies’ ideological gap with the countries hosting their supply chain widened, they experienced nearly 19 percent more disruptions when those countries had strong institutions.
A good example of a company that proactively preempts such disruptions is InCountry. The San Francisco-based data firm established data storage and processing facilities in Japan early last year, apparently in anticipation of the government’s tightening of personal information protection laws. InCountry’s move demonstrates how the prospect of swift enforcement, facilitated by strong institutions, can directly impact business operations.
Second, intellectual property is particularly vulnerable to political and ideological differences. Our data show that when ideological gaps widened, companies with significant R&D reduced sourcing by an additional 35 percent compared with traditional manufacturers. This heightened sensitivity reflects the particular challenges technology companies face in protecting intellectual property across ideological divides.
Take Japan’s strategic pivot towards “friendshoring”. The country’s emphasis on building resilient supply chains with ideologically aligned partners has fundamentally reshaped how technology companies approach IP protection. Japanese firms such as Sony and Toshiba are increasingly prioritising partnerships in markets with shared values around intellectual property rights, even at the cost of higher operational expenses.
The third factor that renders supply chains vulnerable to ideological shifts is that conventional financial measures appear to offer little protection against supply chain disruptions. Measures such as raising inventory levels or working capital did little to buffer the companies in our research against disruption.
Perhaps as a result, even companies with strong cash positions and sophisticated inventory management reduced sourcing from ideologically distant countries as much as less endowed firms.
South Korea’s recent political crisis illustrates this challenge. The uncertainty surrounding President Yoon’s impeachment has prompted many multinational companies to reassess their South Korean operations. The crisis was said to have been partly precipitated by controversial bills pushed by the opposition Democratic Party, including one that would empower lawmakers to compel companies to submit documents containing trade secrets.
The move underscores how differences in political ideology can directly threaten intellectual property protection and business operations. Foreign semiconductor companies including Applied Materials, Lam Research, KLA and ASML, which have been investing in or strengthening production capability in South Korea, may need to reevaluate their decisions.
Importantly, when companies reduce sourcing from countries following ideological shifts, these changes tend to be permanent rather than temporary. The evidence indicates that companies actively seek alternative suppliers in more ideologically aligned markets, reflecting a structural reorganisation of supply chains rather than short-term risk management.
The price of inertia
Not all companies tweak their supply chains when new governments come into power or when policies change. But failure to act may pose reputational risks in addition to operational ones.
We found that companies that continued operations in ideologically distant markets faced over 30 percent more environmental, social and governance (ESG) incidents, from labour disputes to environmental compliance failures. These incidents often stemmed from differences in how local governments and global corporations view environmental standards, worker protection or privacy.
Consider the experience of US technology companies in South Korea. Alphabet, Apple and Meta have been navigating an increasingly complex regulatory landscape in recent years, as the government’s priorities shift towards enhanced privacy and data localisation. Failure to anticipate these changes can lead to expensive consequences, such as the US$72-million fine slapped on Alphabet’s Google and Meta in 2022 for privacy law violations.
Similarly, in Japan, high-profile foreign companies like Tesla face increased regulatory scrutiny and public criticism over sustainability. The pattern suggests that ideological distance serves not just as a risk metric but as an early warning system for potential ESG challenges.
Building resilient supply chains
These insights point to a fundamental shift in how companies should approach global sourcing strategies. Traditional frameworks focusing solely on costs, quality and delivery times are no longer sufficient. Business leaders must now incorporate sophisticated analysis of ideological alignment into their sourcing decisions.
This can be done by systematically assessing exposure through three key dimensions:
1.Evaluate your supplier portfolio’s institutional context
In countries with strong rule of law such as Japan or South Korea, track legislative proposals and regulatory changes that could affect your operations. In our study, companies that successfully managed political distance monitored policy shifts in supplying markets closely, often establishing dedicated teams to assess potential impacts before they materialised.
2. Map your intellectual property exposure against political alignment
Companies with valuable IP should be particularly cautious when ideological gaps widen. For example, several major pharmaceutical companies have recently shifted their R&D operations to markets sharing similar approaches to IP protection. For example, AstraZeneca relocated its global R&D headquarters from the United Kingdom to Cambridge, Massachusetts, to be closer to the robust biotech ecosystem and similar IP protection standards. Such a move, however, could entail higher operating costs in exchange for reduced political distance risk.
3. Analyse how your ESG commitments interact with local political environments
Leading companies are developing sophisticated frameworks that balance their sustainability goals against political realities. Some achieve this by maintaining different operational models across markets or going above and beyond local environmental standards in politically distant markets to avoid running into trouble with the authorities.
The most successful companies manage political distance not as an unavoidable risk but as a strategic consideration in supply chain design. This means moving beyond simple risk mitigation towards actively seeking alignment advantages.
For instance, some companies are building dedicated supplier networks in politically aligned markets, even if costs are initially higher, recognising that lower political distance risk can offset higher operational expenses.
The convergence of Trump’s America First policies, progressive corporate values and diverse global political shifts will only further complicate business environments. Success requires moving beyond reactive responses to political events and towards comprehensive strategies that keep a lid on ideological risk. Companies that do so will be better positioned to build resilient supply chains in an increasingly polarised world.
*The study is co-authored by Jie Peng from Tongji University and Jing Wu from the Chinese University of Hong Kong.
This article was first published in Nikkei Asian Review.
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