Multinational Enterprises and Natural Disasters: Challenges and Opportunities For IB Research

Journal of International Business Studies (2022) 53, 231–254
ª 2021 Academy of International Business All rights reserved 0047-2506/22

www.jibs.net
PERSPECTIVE
Multinational enterprises and natural

disasters: Challenges and opportunities
for IB research
Chang Hoon Oh1 and Abstract

The purpose of this paper is to encourage and to extend research on natural
Jennifer Oetzel2 disasters and international business (IB). More specifically, we review the
1
characteristics of natural disasters and the unique challenges they pose to the
School of Business, University of Kansas, 1654
business environment and examine how they differ from other types of
Naismith Dr, Lawrence, KS 66045, USA;
2
Management Department, Kogod School of
disasters/crises often researched in the IB literature. Next, we investigate the
Business, American University, 4400 applicability and challenges of core IB theories to the study of natural disasters.
Massachusetts Ave., Washington, D.C., By extending new internalization theory (NIT) to overcome challenges of
NW 20016, USA bounded rationality and reliability, we identify effective strategies for managing
the threat of natural disasters through establishing multi-sector partnerships
Correspondence: and alternative supply chains. Integrating research on the characteristics of
J Oetzel, Management Department, Kogod natural disasters and the insights from NIT, we propose natural disaster
School of Business, American University,
management strategies for multinational enterprises (MNEs) based on varying
4400 Massachusetts Ave., Washington, D.C.,
NW 20016, USA
degrees of geographic scope of natural disasters and MNEs. This paper
e-mail: [email protected] concludes with proposing new research opportunities for IB scholars in disaster
preparedness, cross-organizational collaborations, and supply chain
management.
Journal of International Business Studies (2022) 53, 231–254.
https://doi.org/10.1057/s41267-021-00483-6
Keywords: natural disasters; COVID-19 pandemic; multinational enterprises; internal-

ization theory; multi-sector partnerships; supply chain management; climate change; risk
management
INTRODUCTION
In North America and many parts of Europe, the summer of 2021
may be remembered as a watershed moment when it comes to
recognition of the threat posed by natural disasters. From news
reports of wildfires in British Columbia and Northwest Ontario,
Canada, the Sakha Republic in Russia, Sardinia and the Western
Even with all our technology and the inven-
Mediterranean, Turkey and the Eastern Mediterranean, Finland,
tions that make modern life so much easier and the western United States, to devastating flooding in Germany,
than it once was, it takes just one big natural Belgium, China, and Lagos, Nigeria (as a few examples), press
disaster to wipe all that away and remind us reports suggest that people are seeing the threat of disasters in a
that, here on Earth, we’re still at the mercy of
new way, and as more than isolated events (Berger & Adam, 2021;
nature. Neil deGrasse Tyson
Received: 18 June 2020
CNN, 2021; Kahn, 2021; Taylor, 2021).
Revised: 20 August 2021 The threat of disasters is not new. Yet, the ominous predictions of
Accepted: 7 September 2021 a ‘new normal’ by climate scientists (Tharoor, 2021), the threat of
Online publication date: 8 January 2022
Multinational enterprises and natural disasters Chang Hoon Oh and Jennifer Oetzel
232
COVID-19 (also a natural disaster) as of this writ- the evacuation of 200,000 more people from the
ing, and a retreat from economic and political area (Pescaroli & Alexander, 2015: 63). Overall, at
cooperation, are making the prospects for an least 32 million people in Japan are thought to have
effective response to disasters ever more challeng- been affected by radioactive fallout (Smith, 2015).1
ing. With respect to the COVID-19 pandemic, Due to these events in Japan, global supply
individual countries must not only deal with the chains, particularly in the auto industry, were
spread of the virus within their own borders, but almost entirely stalled for 90 days. This greatly
also the spread of more contagious, and potentially disrupted automobile production in Europe, the
more lethal, variants from other countries. Yet, United States, and elsewhere (Olcott & Oliver,
vaccine development and distribution, and the 2014). Agriculture in the region was devastated by
containment of cross-border spread of the virus radiation causing shortages in food supply. Utilities
and its variants, requires international cooperation. were also disrupted and there was an exodus of
Like other types of natural hazards, including the thousands of workers from the region. These events
potential for floods, wildfires, storms, and earth- complicated rescue and recovery efforts and nega-
quakes, among others, contagious viruses need not tively affected long-term economic prospects in the
result in disasters such as epidemics or pandemics region (Pescaroli & Alexander, 2015: 65).
(Oetzel & Oh, 2014; Oh & Oetzel, 2011). It is when To be clear, the natural hazards that we face are
society is not prepared that naturally occurring not new. Rather, what is different today are: (1) the
hazards are most likely to become disasters (Oetzel current and predicted increase in the prevalence
& Oh, 2021). and severity of natural hazards, particularly those
The triggers of natural disasters include various linked to climate change, (2) the growing potential
natural forces caused by geophysical, meteorolog- for cascading disasters, and (3) the need for MNEs
ical, hydrological, climatological, and biological to prepare for and manage these challenges. If an
forces, but their fundamental causes include not era of increased international cooperation gives
only those natural forces but also human involve- way to a period of deglobalization, preparing for
ment such as urbanization, industrialization, pop- crises that cross borders may be even more chal-
ulation growth, over-fishing, and over-farming lenging. Given this backdrop, the question moti-
(Howard-Grenville et al., 2014; Kolk & Pinkse, vating our research is: does the threat of natural
2008; Kreimer, Arnold, & Carlin, 2003; Rivera disasters and the potential for cascading events
et al., 2021). Recognizing the gravity of the threat require a new way of thinking about MNEs’ risk
posed by natural hazards, the United Nations (UN) management across countries? To explore this
includes the need to promote socio-economic question, we begin by explaining the unique char-
resilience, reduce social and organizational vulner- acteristics of natural disasters compared to other
ability to disasters, and address climate change in types of disasters/crises. In particular, the underly-
the UN Sustainable Development Goals (Nohrstedt ing natural forces and their interrelationship with
et al., 2021; Van Tulder, Rodrigues, Mirza, & human involvement make natural disasters com-
Sexsmith, 2021). plex, ambiguous, and difficult or even impossible to
Of particular concern are cases where a disaster in predict (Courtney et al., 1997).
one country can trigger cascading events in others. To understand better the threat of natural disas-
Cascading disasters occur when an initial disaster ters, we then examine whether and how several
sets off a sequence of events that, ‘‘result in related international business (IB) theories can
physical, social or economic disruption’’ and are, explain MNE strategy for managing natural disaster
‘‘associated more with the magnitude of vulnera- threat as compared to other types of uncertainty in
bility’’ than with the specific type of hazard the business environment. Based on the insights
involved (Pescaroli & Alexander, 2015: 65). A from these theories, we focus on and extend new
classic example of a cascading disaster that affected internalization theory (NIT) through the analysis of
MNEs and their global supply chains is the earth- MNE response to the threat of natural disasters
quake off the coast of Japan in 2011. One hundred focusing on the notions of bounded rationality and
people died because of the earthquake and another reliability. NIT is known for its validity in analyzing
18,000 people were killed after the earthquake and explaining a wide range of recent IB phenom-
triggered a tsunami (Pescaroli & Alexander, 2015: ena focusing on two building blocks; the country
63). The tsunami then damaged the Fukushima business environment and firm capabilities (Narula
Daiichi Nuclear Power Plant’s reactors leading to et al., 2019; Rugman & Verbeke, 2008). We then
Journal of International Business Studies

233
propose strategies for managing the complex threat involvement. By human involvement we refer to
of natural disasters given the varying degrees of the the degree to which people increase (or decrease)
geographic scopes of natural disasters and MNE the threat of natural hazard through their interac-
operations. We conclude with recommendations tion with nature and the ability of humans to
for future research and offer specific questions that prevent a hazard from becoming a disaster. Some
merit attention. types of disasters are a result of complex human
activities. For instance, for industrial disasters, train
wrecks, large scale digital hacking, terrorist attacks,
CONCEPTUAL BACKGROUND and violent conflicts, high levels of human involve-
ment are always a main cause. These types of
Natural Hazards and the Increasing Threat
disasters induced by human activities can be clas-
of Natural Disasters
sified as (close to) a risk from Knight’s dichotomy
The degree to which a particular location faces a
(Knight, 1921). Here we call it systematic uncer-
natural hazard is a function of the impact and
tainty because its probability is less known com-
frequency of the hazard (i.e., the threat; natural
pared to conventionally considered risks such as
forces), and the vulnerability of society to the
exchange rate risk, inflation risk, country gover-
threat of that disaster (i.e., the ability of humans to
nance risk, or technological change.2
mitigate or exacerbate the threat; human involve-
Within the class of natural disasters, some disas-
ment) (Fuchs et al., 2012: 1969; Oetzel & Oh, 2021).
ters have underlying causes that consist of exoge-
Based on the historical record and scientific anal-
nous natural forces with low levels of human
ysis, it is possible to estimate whether a particular
involvement. Geophysical and meteorological dis-
location is prone to specific types of hazards such as
asters are considered examples of these types of
earthquakes, volcanic activities, storms, and wild-
natural disasters. In Knight’s dichotomy, these
fires. However, there are high levels of uncertainty
types of natural disasters are (close to) uncertainty
around the likelihood, frequency, and intensity of
(Knight, 1921), which we call unsystematic uncer-
major disasters. Unfortunately, such uncertainties
tainty to distinguish it from systematic uncertainty,
are likely to worsen given the rapid pace of climate
which is more knowable. The occurrence and
change and the resulting impact on natural
intensity of these natural disasters are unsystematic
hazards.
and uncertain, and thus it is difficult to predict and
Of course, not all locations face the same types of
to prepare for them. Thus, the nature and extent of
risk, and the frequency and severity of natural
disaster preparation that should and could be
hazards differ across countries. Recognizing this, we
undertaken is not always obvious.
illustrate the total number of people killed per year
The second type of natural disasters are the ones
in the 2010s by these five categories of natural
that have comparatively higher levels of human
disasters in Figure 1. While hydrological disasters
involvement including hydrological, climatologi-
are a global concern, other types of natural disasters
cal, and biological disasters than the first type.
are more localized; geophysical disasters mainly
Since human activities contribute toward exacer-
impact Asia, biological disasters tend to affect
bating or mitigating the underlying natural forces
African and Latin American countries, meteorolog-
that affect the frequency and intensity of these
ical disasters impact much of the world except for
hazards, they can be difficult to predict. There are,
North and Central Asia and Africa, and climatolog-
however, some estimable trends concerning their
ical disasters are less prevalent except for Greece,
occurrence and intensity due to the complex
Portugal, Somalia, and the U.S., which experience
interrelations between natural forces and human
severe wildfires. Since countries experience sub-
involvement. Therefore, this type of natural disas-
stantial variation in types and severities of disasters,
ter is a mixture between unsystematic uncertainty
efforts aimed at global collaboration around the
(uncertainty from Knight’s dichotomy) and sys-
mitigation and prevention of natural disaster can
tematic uncertainty (risk from Knight’s
be challenging.
dichotomy).3 While human involvement can be a
Causes of Natural Disasters and the Role critical part of these types of natural disasters,
of Human Involvement without natural forces, these disasters will not
Figure 2 illustrates the classifications of disasters happen. Although people are often part of the
based on two forces: natural forces and human cause of these types of natural disasters, they can
also play a significant role in reducing the threat.

234
Figure 1 The number of killed (yearly average) by types of natural disasters in 2010s.
An example is the case of wildfires. Over the last Natural disasters often impact the broader busi-
few years, wildfires have been increasing in number ness environment in a specific area or for a specific
and severity in parts of the western U.S., posing a industry sector. For example, the volcano eruption
major threat to business and society. In some cases, from Eyjafjallajökull in Iceland between March and
wildfires are caused by the interaction between May of 2010 generated an ash cloud across large
business and nature. In Northern California, Pacific parts of Western Europe. This led to a major
Gas & Electronic (PG&E) is directly responsible for disruption of flights throughout Europe. Some
at least, ‘‘five of the ten most destructive fires in firms were able to prepare during the lengthy
California,’’ between 2015 and 2019 (Penn, Eavis, & eruption period. Korean Air drew up a contingency
Glanz, 2019). According to the director of the plan for this volcanic eruption, while many other
climate and energy policy program at Stanford carriers started cancelling their flights in Europe on
University, the wildfires triggered by PG&E’s out- April 15th. When the company’s flight to London
dated wiring and equipment is ‘‘a failure of man- was redirected to Paris and then Frankfurt on April
agement and a failure of vision’’ (Penn et al., 2019). 15th, the company secured hotel rooms and leased
buses to cross passengers into the U.K. over the

235
Natural Forces
(Unsystematic Uncertainties)
Human Induced Disasters

Natural Disasters Industrial accidents
Extra- Large scale crimes
terrestrial Geophysical - Hydrological Terrorist attacks
disasters Meteorological Biological Political risks
Climatological Wars
Financial crises
Human Involvement
(Systematic Uncertainties)
Figure 2 Types of disasters and human involvement.
Straits of Dover (Lee, 2010). While the direct effect futures; a continuum bounded by a range); and
of the volcanic eruption was likely confined to the Level 4 (a true ambiguity; virtually impossible to
airline industry, the eruption indirectly affected predict). Courtney et al. note: ‘‘[i]t (level 4 uncer-
tourism, the hotel industry, and other businesses tainty) might not even be possible to identify, much less
impacted by cancelled air travel. predict, all the relevant variables that will define the
future’’ (1997, p.5, emphasis ours). Thus, natural
disasters (unsystematic uncertainty) could be level
NATURAL DISASTERS AND IB THEORIES 4 uncertainty, which is less predictable and know-
able compared to systematic uncertainty. The
Characteristics of Natural Disasters
impact of specific types of natural disasters may
As shown in Figure 2, the causes of natural disasters
vary based on the characteristics of the disaster and
are a mixture of human involvement and natural
the inherent uncertainty from natural forces asso-
forces. For these reasons, we consider natural
ciated with the event. First, in comparison to other
disasters as unsystematic uncertainties as opposed
types of disasters/crises, natural disasters tend to
to systematic uncertainties that are exclusively
have a higher level of unpredictability, on average
affected by human action (or inaction) such as
(Buckley, Chen, Clegg, & Voss, 2020; Oh et al.,
banking/currency crises, economic crises, political
2020). For natural disasters characterized by a high
violence, terrorist attacks, and technological/indus-
level of human involvement, such as those associ-
trial accidents. When it comes to the impact of
ated with climate change, climatologists foresee a
both types of uncertainties, there are some similar-
dramatic increase in disasters in hazard-prone areas
ities between the two types of uncertainties. Both
and, as a result, greater risk to people and economic
types can have devastating impacts on victims,
assets (Banholzer, Kossin, & Donner, 2014; Visser
society, and the economy. A key difference, how-
et al., 2014). These trends are only expected to
ever, is the interaction between human involve-
worsen in the foreseeable future. Nevertheless, it is
ment and natural forces making natural disasters
impossible to predict the size of the impact, the
(unsystematic uncertainties) difficult to predict and
location, or the timing of climatic disasters such as
to understand in terms of timing, intensity, scale
storms, floods, droughts, and wildfires. The main
and scope of damages, and loss of life.
reason behind the unpredictability is that the
According to Courtney et al. (1997), uncertainty
underlying determinants of natural disasters are
can be classified into four levels based on whether
less predictable and knowable. This may be why
they are predictable and knowable: Level 1 (a clear-
natural disasters are often called ‘‘acts of God.’’ Not
enough future; a single forecast), Level 2 (alternate
only because of their exogeneous nature and
futures; discrete scenarios), Level 3 (a range of
unpredictability, but also because of their

236
complexity. In short, humans cannot control impact they can have, and the global interconnect-
nature but at times they can influence it. edness of MNE operations, managers of MNEs
Second, adding to Courtney et al.’s (1997) two cannot afford to ignore the threat. Rather, MNEs
dimensions, managers have a considerably low should develop their own plans and strategies for
awareness of natural disaster threat. This lack of addressing the threat of natural disasters. Doing so
awareness and knowledge hinders managers with is especially important since the public sector is not
respect to allocating resources to prepare for and always equipped to respond effectively to natural
manage the threat of natural disasters. This causes disasters, particularly those that blur political and
delays in response and recovery and thus opera- jurisdictional boundaries and/or national borders
tional disruptions when major disaster events occur (Malhotra & Kuo, 2008; Sobel & Lesson, 2007).
(Oetzel & Oh, 2021; Webb et al., 2000). This lack of Given this background, next we examine how
awareness (or low perception) may be attributed to several key IB theories might enable managers to
the fact that managers doubt that they can manage formulate more effective strategies for managing
or prepare for natural disasters, that the preparation the threat of natural disasters to MNEs and their
and management of natural disasters is the role of operations. A challenge that managers face in
private sector, and/or that the natural disaster will preparing for and responding to natural disaster
actually occur (Oetzel & Oh, 2021; Slovic, 2000). threat is that doing so requires them to invest in
Third, the other important characteristic of nat- establishing relationships and formulating strate-
ural disasters that distinguish them from other gies and tactics that might never be used. If a
types of uncertainties is their geographic scope, disaster does not occur, establishing those capabil-
which is more relevant to IB scholars but often ities may be seen as an ‘‘unnecessary cost’’ and a
ignored. Unlike hazards and uncertainties that ‘‘wasted’’ expense. For these reasons, it is easy to
directly affect locations confined by artificial bor- delay or dismiss the decision to prepare for natural
ders and managed by governments, the natural disasters. Since management and much of IB
forces behind natural disasters are oblivious to such research focus on formulating strategies to reduce
human made limits (Yamori & Goltz, 2021). As costs and increase the bottom line, convincing
such, they can directly span different administra- managers to invest in capability development for
tive and judicial controls affecting streets, towns, natural disasters requires a change in organiza-
regions, countries, and the entire planet. A natural tional awareness and managerial mindset.
disaster event can directly damage the entire oper- To date, relatively little work in IB specifically
ations of a MNE, its subsidiaries, its supply chain examines risk management for natural disasters
partners, and/or its various stakeholders. In addi- and some of the unique challenges they pose for
tion, each disaster event has a different intensity strategy formulation, decision-making, and imple-
and geographic scope. If we include the indirect mentation in MNEs. Following several IB theorists
impact, the damage and geographic scope become (Forsgren, 2013; Kano & Verbeke, 2019; Wolf et al.,
difficult if not impossible to quantify. 2012), we choose three dominant perspectives/
theories (NIT, organizational capability view, and
IB Theories and Managing the Threat of Natural institutional theory) that are most relevant to
Disasters formulating MNE’s managerial strategies for
Despite the obvious importance that the increased managing and responding to external uncertain-
threat of natural disasters poses to IB, including the ties. In addition, we include agglomeration econo-
economic, social, and environmental costs to soci- mies and the risk diversification perspective due to
ety, the IB literature is relatively quiet on the topic their close relevance to MNE risk management
of natural disasters. One reason why natural disas- strategies. We do not suggest that this is an
ters do not receive much attention in IB research is exhaustive set of relevant theories. Rather, we focus
that they are considered outside the MNE man- on how several relevant theories in IB can con-
agers’ locus of control. Disasters are deemed the tribute to our understanding of systematic and
domain of natural scientists and government agen- unsystematic uncertainties. Table 1 lists several
cies, not managers of firms. Also, the (direct) core theories and ideas in IB research and details
impact of natural disasters is often highly localized their (un)applicability for exploring systematic and
while research in IB focuses more on country-level unsystematic uncertainties. We do not intend to
risks or larger geographic regions. Given the threat review these theories in detail. Rather, we point out
of cascading natural disasters, the wide geographic key theoretical ideas and examine which

237
Table 1 Applicability of IB theories in explaining systematic and unsystematic uncertainties
IB theory/view Key ideas to IB research (Un) Applicability in explaining uncertainties
Systematic uncertainties Unsystematic uncertainties
New Distinguish location- and non- Systematic uncertainties are Due to the unpredictability and
Internalization location-bound FSAs. Examine how predictable in nature, and thus context specificity of the
Theory MNEs exploit, augment, recombine, MNEs can develop their non- unsystematic uncertainties, MNEs
and allocate those FSAs interfacing location-specific FSAs. MNEs can need to work with local stakeholders
with CSAs to make efficient transfer and adjust them to the to improve their local disaster
governance decisions for themselves context of other locations facing management capabilities, as well as
and their relationships with similar uncertainties. Some of these with supply chain partners to lower
stakeholders FSAs are necessary when firms partners’ opportunistic behavior and
internationalize employ partners’ FSAs. MNEs need
to find mechanisms to improve their
rationality and reliability
Organizational Consider MNEs as unique creators If business environments are Unsystematic uncertainties may
capability view and orchestrators of capabilities. stable or predictable, managers can disrupt existing markets. In addition,
Examine how those capabilities are predict future business environments existing capabilities may be
created and orchestrated across and develop their resource bundle ineffective and/or irrelevant,
borders and help MNEs improve by leveraging their existing hindering the ability to deploy
their international competitiveness knowledge-, experience-, and existing capabilities within MNEs.
learning-based capabilities Developing new capabilities requires
resources and time; two factors that
may be in short supply when an
unanticipated disaster strikes
Institutional Consider MNEs’ internationalization Although the impact can be global, During unsystematic uncertainties,
theory strategies as their adaptive process to most of the systematic uncertainties both formal and informal institutions
host country institutional occur within country borders. either set inconsistent regulations
environments. Examine how various Markets follow institutional and incentive structures or are
types of institutions govern the mechanisms that are governed by insufficient for providing legitimacy
behaviors of MNEs formal and informal institutions. pressures on markets and firms. In
MNEs may anticipate uncertainties, addition, unsystematic uncertainties
understand the institutional are not limited in scope by country
environments in which they (plan to) or other jurisdictional borders. Thus,
operate, and develop their strategies the behaviors of MNEs can be more
and behaviors accordingly complex due to multiple institutional
pressures in varying by locations and
by capacity
Agglomeration Various benefits of geographic MNEs consider Unsystematic uncertainties are often
economies agglomeration can be understood as predictable uncertainties in their a by-product of the agglomeration
the positive outcomes of vertical and decision to enter a cluster to exploit of production and consumption
horizontal linkages in terms of the benefits of agglomeration or activities. The endogeneity behind
production, innovation, and positive externalities agglomeration and unsystematic
knowledge exchange uncertainties makes it difficult to
understand the causality between
location and risks
Risk View geographic diversification of If predictable, MNEs can build If unpredictable, the optimal
diversification MNEs across countries in the same optimal portfolios from their portfolio is difficult to determine.
way as diversification of financial geographic locations to diversify risks Some locations provide unique CSAs
portfolios to manage heterogeneous that may affect the operation of
demand and input conditions. entire MNEs and influence risk at
Examine how geographic MNE-level. Establishing a subsidiary
diversification reduces overall MNE in a location that contributes to the
risks value of the parent firm requires time
and investment

238
theoretical conditions can (or cannot) explain MNE organizational knowledge transfers and learning
strategic responses to systematic and unsystematic (e.g., non-location-bound FSAs). Therefore, MNEs
uncertainties. should develop location-specific knowledge and
capabilities that can be achieved through learning
New internalization theory from and experience with various local partners. To
Several streams of internalization theory com- identify local government capacity around disaster
monly provide strong theoretical logic for the preparation and response, and to identify local
existence of MNEs, their geographic and functional nongovernmental organizations (NGOs), firms, and
boundaries, and their organization structures in other actors that may serve as partners, require time
uncertain external environments (Rugman & Ver- and intentionality (Oetzel & Oh, 2021). Ultimately,
beke, 2008). Evolved from transaction costs eco- effective disaster management relies on these loca-
nomics theory, NIT explains when and why MNEs tion-bound FSAs when MNEs cannot find alterna-
prefer to internalize cross-border activities and tive locations or partners.
develop capabilities related to IB rather than use Second, if CSAs can be deployed in other loca-
market mechanisms (Narula et al., 2019). The tions through affiliates and partners, MNEs need to
initial version of internalization theory (Buckley govern and orchestrate them. How to govern those
& Casson, 1976) emphasizes the rationality of affiliates and partners will depend on first, location
decision-makers who can economize their deci- profile and second, non-location-bound FSAs
sion-making based on cost/benefit calculations. (transferring, deploying, and recombining FSAs).
Such an efficiency-based logic can readily apply to Facing unsystematic uncertainties, cost-minimiz-
systematic uncertainty in the external environ- ing and benefit maximizing governance mecha-
ment, but it may be necessary to reconsider other nisms can be explained using various versions of
behavioral assumptions when applying it to unsys- transaction cost economics and internalization
tematic ones. theory. In the face of unsystematic uncertainties,
NIT extensively considers the resource hetero- the efficiency or profitability of governing mecha-
geneity of firms and the geographic reach of certain nisms would not determine whether an MNE’s
firm-specific advantages (FSAs) (location-bound affiliates and partners can provide their products
and non-location-bound FSAs) (Rugman & Ver- and services as promised in such an uncertain
beke, 2003; Rugman et al., 2012), as well as business environment. This requires more than
behavioral assumptions (bounded rationality and conventional risk management approaches for
bounded reliability) (Verbeke & Greidanus, 2009; affiliates and partners. The absence or unpre-
Verbeke & Yuan, 2005). Like other strategic choices, dictability of formal and informal market mecha-
disaster planning and response requires a combi- nisms during natural disaster events will likely
nation of location- and non-location-bound FSAs. increase opportunistic behaviors. It is also possible
The characteristics of natural disasters that we that affiliates and partners cannot keep their
discuss earlier make it difficult to transfer, deploy, promises if they sustain severe damage. This is
and recombine FSAs effectively (Rugman & Ver- consistent with research showing that because of
beke, 2003; Verbeke, 2003). For this reason, NIT the unpredictability of natural disasters, supply
may offer insights into MNE strategies for address- chains cannot always be lean. Optimizing supply
ing the threat of both systematic and unsystematic chains requires the ability to reliably forecast
uncertainties. conditions (Kunz et al., 2017).
First, if the focal location provides unique and
non-replaceable country-specific advantages Organizational capability view
(CSAs), NIT implies that strong FSAs enable MNEs The organizational capability view (resource-based
to efficiently exploit those CSAs. Due to increased view, knowledge-based view, and their variations)
external transaction costs, when operating under explains how FSAs, such as superior capabilities
uncertainties, MNEs and their subsidiaries need to around knowledge and learning, can be sources of
develop and internalize strong FSAs including risk competitive advantage. These capabilities or
management capabilities. A challenge, however, is resources should be valuable, rare, and inimitable to
that the contextual specificity of natural disasters constitute a competitive advantage (Barney, 1991;
may limit the benefits of knowledge acquisition Mahoney & Pandian, 1992). Over time, developing
and experiential learning from conventional mech- such internal capabilities and resources requires
anisms such as international intra- and inter- substantial managerial attention and valuable

239
organization assets. If business environments are and the ability to deploy existing dynamic capabil-
stable and generally consistent, firms can integrate ities within an MNE. Due to the episodic nature and
and recombine existing resources and capabilities rarity of natural disasters, firms are likely to forget
rather than develop wholly new FSAs. the lessons learned in previous disasters (de Holan
In uncertain and changing environments, & Phillips, 2004; Kano & Verbeke, 2015; Oh, Shin,
dynamic capabilities, when effective, can enable & Oetzel, 2021). Firms need to use the lessons
organizations to adapt to rapid changes in the learned from experience with natural disasters
environment. An organization’s proficiency for regularly, otherwise they may unintentionally lose
developing dynamic capabilities may be a function any gained knowledge (de Holan & Phillips, 2004;
of well-established organizational routines, its abil- Walsh & Ungson, 1991). Firms may also forget the
ity to learn from past experiences and, perhaps lessons learned because they may consider certain
most importantly, experience with crises (Pavlou & lessons to be relatively unimportant in performing
El Sawy, 2011; Teece et al., 1997). While prior daily business. Since managers cannot predict the
experience and related dynamic capabilities can be next occurrence of a natural disaster or its intensity,
valuable, they are not always relevant for rapidly they may give little attention to addressing the
changing and uncertain environments. One reason threat of natural disasters. What is perceived as
is that, when it comes to responding to natural uncontrollable may thus be ignored (Pearson &
disasters, conventional market-oriented capabilities Mitroff, 1993; Slovic, 2000).
and approaches may not be appropriate. Moreover, The tendency to lose knowledge if not codified or
managers and their firms may not be able to updated is not unique to the threat of natural
integrate and recombine existing resources, nor disasters. Empirical research on other types of
develop new capabilities, in a short period of time. unsystematic uncertainties identifies similar
This is because disasters may disrupt existing boundary conditions on experience and learning
markets rendering existing resources and capabili- around risk management (Buckley et al., 2020; Oh
ties ineffective or irrelevant. et al., 2021). Thus, when it comes to unsystematic
Nevertheless, certain capabilities might be valu- uncertainties, the application of experiential learn-
able and useful for addressing the threat of disas- ing and the use of dynamic capabilities must be
ters. Thus, MNEs need to identify valuable skills periodically revalidated for those firm-specific
and competencies and recombine their existing resources to be valuable and relevant.
capabilities to adjust to new (temporal or perma-
nent) environments. When threats are relatively Institutional theory
certain and predictable (i.e., risk), MNEs can Institutional theory considers country- (or loca-
recombine their existing capabilities and resources tion)-specific environments as sources of opportu-
in a relatively short amount of time (Kieser & Koch, nities and challenges when business environments
2008). Thus, for systematic uncertainties, MNEs are systematically uncertain. Institutional theory
may recombine their resource bundle by leveraging assumes the existence of formal or informal insti-
their existing knowledge-, experience-, and learn- tutions that govern the behaviors of firms and
ing-based capabilities that will help to improve people within country borders or other legally
bounded rationality under uncertainty. The Upp- defined context (Kostova et al., 2008; Meyer &
sala model of international expansion also suggests Peng, 2016; North, 1990). In IB, the relevant
the potential benefits of exploiting experiential institutions often govern the home country, host
learning through the internationalization process country, or home-host country dyad (Tihanyi,
that outweigh the risks and costs of doing business Devinney, & Pedersen, 2012; van Hoorn & Mase-
in new and unknown environments (Johanson & land, 2016).4
Vahlne, 1977). Much of the literature on institutional transition
In contrast, managers facing unsystematic uncer- and change, and the impact of institutional change
tainties may have a poor understanding of how on firm strategy and organizational structures
their resources can be recombined and utilized. For (Hoskisson et al., 2000; Peng, 2003), focuses on
managers, the unpredictability, rarity, and com- events in transition economies and emerging mar-
plexity of natural disasters may result in a lack of kets and those occurring because of political regime
time and attention, bounded rationality, and cog- changes. Institutional changes such as these are
nitive biases around natural disaster management outcomes of human activities and may be some-
(Lockett et al., 2009). These may hinder learning what more predictable based on various country-

240
level (or sub-national-level) political, economic, Other relevant theories

and social factors. Most catastrophic natural disas- Among many other theories/views, we find that
ter events occur across those artificial borders, agglomeration economies and the risk diversifica-
raising issues around national sovereignty and tion perspective are most relevant to natural disas-
jurisdictional control. Therefore, during catas- ter management. First, the recent focus on
trophic natural disasters, collaborations across loca- economic geography in IB as it pertains to vertical
tions and over levels of hierarchy are difficult as relationships (value chains or global factories)
expectations and impacts (even from the same considers MNCs as a coordinator of activities in
event) are different across countries and societies. different locations. From that perspective, the
During and after natural disasters, markets and optimal location and ownership strategies are cho-
firms can have different governing mechanisms sen by quantifying factors such as trade costs,
and goals from those set by formal or institutional economies of scale, factor endowments, and effi-
institutions in a country or society. It is not rare to ciency as well as firm-level heterogeneity (Beugels-
observe panic buying and price gouging for essen- dijk et al., 2010; Buckley & Ghauri, 2004). However,
tial goods during natural disaster events, such this approach for identifying the optimal location
behaviors are very different from market mecha- and ownership strategies would not hold in the
nisms or social norms observed in normal times case of natural disasters because some of their
(Oh & Reuveny, 2010). Thus, because both formal underlying factors are not easily quantifiable.
and informal institutions either set different regu- In addition, the central ideas in optimal location
lations and incentive structures during and after and ownership choices in economic geography are
natural disasters (e.g., new institutional eco- based on agglomeration economies. Agglomeration
nomics), or are insufficient for providing pressures economies are positive externalities from the geo-
for legitimacy on markets and firms due to chaos graphic clustering of industry. The benefits from
and unpredictable changes (e.g., neo-institutional clustering include technology and knowledge spil-
theory), institutional theory may not be sufficient lovers, low production and procurement costs, and
for explaining the strategies and behaviors of firms low search costs from geographic concentration
in case of unsystematic uncertainties. The behav- (Shaver & Flyer, 2000). The benefits can vary by a
iors of MNEs can be more complex as they confront firm’s competitive position and thus the most
multiple, and sometimes conflicting, institutional competitive firms may internationalize earlier than
pressures set by different sovereignties (Hillman & other firms (Helpman, Melitz, & Yeaple, 2004;
Wan, 2005; Westney, 1993). McCann, 2011). As we discussed in a previous
Similarly, while not often considered a part of section, some types of natural disasters are biprod-
institutional theory, other relevant views such as ucts of the agglomeration of human and industrial
the liability of foreignness (Zaheer, 1995), psychic activities. For instance, the impact of natural
distance (O’Grady & Lane, 1996), and the CAGE disasters is likely to be much higher in urbanized
model (Ghemawat, 2007) assume that home coun- and highly populated areas where businesses lever-
try MNEs, or MNEs from neighboring countries, age their economies of scale (Oh et al., 2020;
can economize their cost advantages based on Perrow, 2011). The endogeneity behind agglomer-
institutional factors and psychic closeness. Specif- ation and the occurrence and impact of natural
ically, these approaches assume that MNEs lower disasters makes it more difficult to analyze the
various costs, such as searching, monitoring, and causality between location and disasters. In turn, it
coordination costs, by locating their operations in becomes more difficult to recommend the optimal
countries that provide better institutional and location and ownership strategies of MNEs when
locational factors or closeness. While home country we use country or location as a level of analysis.
MNEs may have better knowledge about a govern- Second, the finance-based portfolio approach
ment’s capacity in dealing with natural disasters, provides a unique view on risk diversification for
the applicability of both formal and informal MNEs. That is, engaging in foreign operations
institutions would be limited in the case of natural reduces the MNE’s corporate risks (Rugman, 1976)
disasters because the impact of natural disasters when economic cycles in different geographic areas
does not depend on the nationality or headquarters are not perfectly correlated. In such cases, increased
(HQ) location of MNEs. overseas operations may help an MNE offset

241
increased risk in one market because the risk in an MNEs, relies on incomplete information, limited
MNEs’ total investment portfolio is diversified management information processing capacity, and
across geographies. The benefits of diversification headquarters and subsidiary-level conflicts that
include stabilizing revenue streams from heteroge- arise when organizations suffer from biased deci-
neous demand conditions across countries (Rug- sion-making that may stem from a variety of
man, 1976) and transferring factors of production sources. Natural disasters often generate unusual
across countries to exploit differences in input market imperfections making it difficult for man-
costs, exchange rates, and tax rates to achieve agers to strategize and, thus, for firms to transfer,
operational flexibility (Allen & Pantzalis, 1996; deploy, and recombine their FSAs.
Belderbos et al., 2020). In contrast to bounded rationality, bounded
However, if a country or location offers an MNE reliability refers to the inability of managers to
non-replaceable CSAs, the disruption of a sub- make good on open-ended promises (Verbeke &
sidiary’s activities can interrupt the operation of Greidanus, 2009). Bounded reliability builds on the
the MNE as a whole, at least in the short-term. Even observation that individuals may fail to uphold
in the case that CSAs are replaceable with those in their commitments, but they do not necessarily do
other locations, establishing a subsidiary that con- so out of opportunism. Good faith failures appear
tributes to the value of the parent firm (i.e., responsible for the bulk of unfulfilled commit-
portfolio) requires time and investment. Thus, if ments in and around firms (Kano & Verbeke, 2015;
managers have knowledge about uncertainties and Verbeke & Greidanus, 2009). For example, man-
can anticipate them, they can gradually reconfig- agers may reprioritize their organizational objec-
ure their locational portfolio to balance the benefits tives. It is not uncommon, for instance, for
and risks of their investments. In contrast, when managers to consider disaster management as
confronted with unsystematic uncertainties, MNEs essential after a major crisis. As time goes by,
cannot quickly nor easily reconfigure their sub- however, managers and their organizations may
sidiary location portfolios. In that case, risk diver- begin to forget past experiences. Day-to-day pres-
sification through location portfolio alone cannot sures may eventually lead managers to downgrade
fully optimize the risk exposure of MNEs to unsys- disaster planning as a priority. Time discounting
tematic and unpredictable uncertainties. It does, bias may lead managers to place a lower value on
however, suggest the importance of establishing future events than on more proximate ones (Fred-
alternative supply chains that can be utilized in the erick et al., 2002; Verbeke & Greidanus, 2009).
case of natural disasters. Thus, disaster preparedness will not have a priority
in decision-making unless managers foresee natural
Application of New Internalization Theory disasters as a significant threat. Moreover, experi-
to Natural Disaster Management Strategies ence with low impact natural disasters may lead
IB research is well suited for addressing natural managers to underestimate and potentially ignore
disaster management and business continuity since the threat of natural disasters (Oetzel & Oh, 2014;
complex global challenges tend to require interdis- Verbeke & Greidanus, 2009).
ciplinary research and insights; one of the strengths The unpredictable, unknowable, and contextual-
of IB (Sullivan & Daniels, 2008). In particular, NIT specific nature of natural disasters can challenge
is known for its resiliency, flexibility, and validity the rationality of managers because of incomplete
in analyzing MNEs and their operations and or limited information, and subjectivity in infor-
explaining a wide range of recent IB phenomena mation processing and decision-making about nat-
(Narula et al., 2019; Rugman & Verbeke, 2008). In ural disasters (Verbeke & Yuan, 2005).
this section, we will examine how NIT supports Organizations in complex business environments
MNE managers’ decision-making for the establish- with high levels of uncertainty need to have higher
ment of alternative supply chains and multi-sector levels of information processing abilities to make
partnerships for MNEs facing natural disaster risks quality decisions (Dess & Beard, 1984). However,
and provide examples. managers will neither have the same levels of access
The notions of bounded rationality and reliabil- to an MNE’s resources nor enough time to develop
ity are core components of NIT theory. Verbeke and new resources during a disaster event. Thus, with
Yuan (2005) outline the key sources of both why high levels of bounded rationality, managers may
and how they relate to IB research. Bounded rely more on the reliability of their partners.
rationality, as it relates to decision-making in

242
Access to valuable knowledge is at the heart of Additional examples will illustrate the difficulties
formulating effective responses for managerial that MNEs face in the case of natural disasters and
dilemmas. Without trust-based relationships, it is the importance of establishing and coordinating
unlikely that one organization operating alone can trust-based relationships with alternative supply
develop and implement a disaster response strat- chain partners. Xirallic pigments, a specialty paint
egy. Trust is also critical for MNEs seeking to for cars, has been manufactured only in the earth-
establish relationships with secondary stakehold- quake zone of the March 2011 Great Tohoku
ers, such as various government agencies, NGOs, Earthquake and Tsunami in Japan. At the time of
and communities, who do not have direct contrac- the earthquake/tsunami, a range of Japanese, U.S.,
tual safeguards or economic incentives to partner and European automakers quickly found it impos-
with MNEs (Kano & Verbeke, 2015). sible to produce certain colors of their vehicles
An understanding of the factors that create biases without this important paint additive (Canis,
in decision-making around natural disaster prepa- 2011). For its part, Merck Chemicals publicly stated
ration and response can lead to insights into ways that it would immediately supplement its produc-
of responding to natural disasters. Researchers in tion of the pigment in Japan with production at a
the natural sciences, policy sciences, and IB gener- new facility in Germany (Canis, 2011). In reality,
ally agree that the effective development and however, it took a year to begin a second Xirallic
coordination of alternative supply chains and production line in Germany (Tajitsu, 2016).
multi-sector partnerships (characterized by high General Motors, which did not produce its vehi-
levels of trust among partners) is necessary well cles in Japan, also had to close a plant in Louisiana,
before a realized disaster. Doing so in advance is layoff its workers in New York, and cancel some
vital for overcoming biases in decision-making and shifts in South Korea, Spain, and Germany due to
forming effective strategies that can be successfully shortages in components. To help its suppliers
implemented (Han et al., 2017; Kano & Oh, 2020; during their recovery in Japan, General Motors
Oetzel & Oh, 2021). tried to get key components that were in short
supply. The CEO of General Motors, Dan Akerson,
Alternative supply chains told a reporter ‘‘we can’t rely on one source [of
While trustworthy relationships with affiliates and suppliers]. So, I picked up the phone, I called the
partners are always valued, they can be critical CEO of Freescale and I said, ‘I know you make chips
when it comes to disaster management. For exam- of this type’’’ (Automotive News, 2011). Rob Mills,
ple, early in the COVID-19 pandemic there was a director of GM Components Holdings underlined
drop in vehicle sales, which in turn led auto in an interview, ‘‘I know who to call in the
manufacturers to cut their orders for computer organization, who works well in crisis, who has
chips. As some countries began to recover from the right skill set, who has the stamina to survive in
COVID-19 in 2021, there was a rapid increase in the environment, and who also has know-how to
demand for vehicles. Automakers subsequently work within their function and across the func-
faced a major challenge since semiconductor pro- tions’’ (Sheffi, 2015). After the disaster, several
ducers already agreed to sell their chips to elec- automotive companies developed supply chain
tronics and IT firms. Consequently, the global databases and required prospective partners to
shortage of semiconductors caused delays and cuts include alternative sourcing plans for parts (Tajitsu,
in production throughout the global automotive 2016).
industry (Vakil & Linton, 2021).
MNEs that established trusted relationships with Multi-sector partnerships
affiliates, partners, and suppliers prior to the short- Disaster management experts note that the devel-
age of chips, may subsequently enjoy increased opment of effective multi-sector collaborations is
knowledge and lower search costs and opportunis- critical. Leading experts argue that ‘‘collaboration is
tic behaviors when working with others. The shared a necessary foundation for dealing with both
knowledge and collective insights common natural and technological hazards and disasters
between an MNE and its trusted partners can be and the consequences of terrorism’’ (Waugh &
invaluable in a crisis. Thus because of these rela- Streib, 2006: 131). Multi-sector collaborations
tionships, MNEs will be able to achieve both involve a mix of actors from public, private, and
resource flexibility as well as coordination of those civil society organizations. Given the location
flexible resources (Sanchez, 1995). specificity of natural disasters and actors, MNEs

243
need to develop multi-sector collaborations in each following their actions, Walmart has made disaster
risky location. Collaborations that are committed preparation and response central to its operations
to addressing a shared concern, and that are guided (Henderson & Weber, 2016). Yet, even a company
by vision and effective strategy, are those most the size of Walmart cannot go-it-alone. When
likely to succeed (Waugh & Streib, 2006). providing relief after a 2017 earthquake in Mexico
Yet, effective coordination and preparation are City, or preparing for natural disasters in other
not easy to achieve. Research shows that multi- countries, Walmart needs both short- and long-
sector partnerships often experience difficulties term partnerships that can be leveraged as needed
maintaining ongoing partner participation (Business Wire, 2017).
(MacDonald et al., 2019). Furthermore, collabora- Considering both cases (i.e., alternative supply
tive decision-making in complex environments chains and multi-sector partnerships), to be effec-
depends on various factors such as sharing com- tive MNEs need to build strong local and interna-
mon values and goals, reciprocity, lateral commu- tional relationships to address the complex
nication, information sharing, continual feedback, managerial and logistical challenges related to
and learning (Bundy et al., 2018; MacDonald et al., disaster management. All partners must share a
2019; Woods, 2009). high degree of trust and common interests. This
Researchers long recognize the value of multi- requires temporal and financial investments to
sector collaborations noting that relationships and develop and identify appropriate suppliers and
networks may enable managers to leverage local partners. Another benefit of reliable relationships
stakeholders and their resources (Hennart, 2009; is that they can improve organizational decision-
Teegen et al., 2004). For managing disasters, how- making and lower bounded rationality.
ever, MNEs must be able to move away from
wanting to ‘‘control’’ a partnership and structure
it for its own ends. Rather, any collaboration GEOGRAPHIC SCOPES AND MNE RISK
should be designed to create shared social and MANAGEMENT STRATEGIES
economic value. Organizations that come together Internalizing and recombining location-bound or
with complementary capabilities, which share a non-location-bound FSAs to develop trust-based
vision for improving resilience to disasters, and that relationships with affiliates, partners, and stake-
are not dominated by the control of one entity or holders would be beneficial to MNEs for the
sector, will likely be most effective preparing for, preparation of and coping with high impact natural
and managing responses to, natural disasters (Da- disasters. The benefits of trust-based relationships,
han et al., 2010). Where possible, these multi-sector however, would depend on the levels of MNE risk
networks will provide complementary resources to exposure. MNEs face exposure to high levels of
subsidiaries, particularly for those that are able to natural disaster threat when the geographic scope
recombine those external resources with their of a disaster is large and/or when the MNE creates
existing FSAs. To do this, the subsidiary must be value through the geographic scope of its opera-
sufficiently embedded in the local context (Dha- tions. The first case is more straightforward. MNEs
naraj et al., 2004). It will enable them to reserve face a greater threat when the geographic scope of a
their financial and temporal resources to develop disaster is large, since it is more likely to impact an
new FSAs that can be leveraged during challenging MNE’s business environment. However, high
times. impact natural disasters, with a low geographic
When Hurricane Katrina hit the Gulf Coast of the scope, in a key location for a MNE, can also disturb
United States in August of 2005 and devastated its entire operations and lower its performance. We
New Orleans, Louisiana, it was a watershed describe such a situation in our earlier example of
moment for the U.S. MNE Walmart. Based on the automotive industry, post-earthquake and
employee initiative and its core competencies in tsunami in Japan in 2011. In the second case,
logistics and supply chain management, the com- MNEs with a large geographic footprint are more
pany provided water and other supplies to survivors likely to find themselves in one or more disaster-
before the local and state governments were able to prone locations and thus exposed to natural disas-
do so (Henderson & Weber, 2016). Realizing both ters. For these reasons, the effectiveness of an
the devastation wrought by Hurricane Katrina, MNE’s risk management strategy, including the
their unique ability to help given their core com- use of alternative supply chains and multi-sector
petencies, and the outpouring of goodwill

244
partnerships, depends on the geographic scope of the MNE. Since the geographic scope of disasters is
both natural disasters and MNEs. low and the MNE’s FSAs are bounded by location,
It is also important to note that disasters in one the firm can choose a safe location where it can
country can impact both local and IB environ- exploit, utilize, and combine its location-bound
ments. At the site of the disaster, MNE subsidiaries FSAs and CSAs. Thus, the MNE can adopt an
risk damage to infrastructure, discontinuity of avoidance strategy for the threat of natural disasters
operations, and threats to employees’ health and and dramatically reduce or even eliminate disaster
well-being. At an international level, MNE supply threat by divesting from the high-risk locations.
chains may be threatened in areas far from the Because the scope of natural disaster risk is low, it
disaster site. Natural disasters with a large geo- would be more cost efficient for MNEs to avoid a
graphic scope may defy the sovereignty of borders, risky location and choose a safer one. In this case,
complicating the management of, response to, and the MNE may find a safer location in which the
severity of a disaster. These issues are likely to be MNE can access location-bound FSAs and recom-
magnified by different government policies and bine them with its existing FSAs.
cultural norms across countries. This illustrates the In some cases, an avoidance approach aimed at
importance of public sector cooperation and coor- removing the source of threat may greatly reduce
dination for addressing (or failing to address) an the probability of a disaster (Alcacer & Herman,
international crisis involving multiple country 2012; Jüttner et al., 2003). However, as discussed in
governments, it is also possible for a natural disaster earlier sections, many types of natural disasters are
in a single country to create ripple effects across unsystematic and unpredictable uncertainties, so it
global supply chains. is possible that at some point in the future, once
In Figure 3, we propose strategies that managers relatively safe locations can become affected by
of MNEs may employ at varying levels of geo- natural disasters. Thus, MNEs may also need to
graphic scope of MNEs and natural disasters. The insure their investments from uncertainties. In
horizontal axis is geographic scope of MNEs indi- addition, if MNEs are unable to avoid operating in
cating whether the geographic reach of their FSAs a particular location because they need to access
and operations are mainly location-bound FSAs unique and non-replaceable location-bound FSAs,
(low geographic scope) or non-location-bound FSAs or country-specific factors, a MNE may leverage
(high geographic scope) (Rugman et al., 2012). The insurance mechanisms. Even in that case, however,
vertical axis is the geographic scope of natural climate change is leading insurance companies to
disasters indicating the prevalence of natural disas- reduce current levels of coverage or raise rates to
ter threat in potential locations of MNEs. unaffordable levels in the future (Tesselaar et al.,
2020).
Avoidance Strategy
Quadrant 1 of Figure 3 shows the case of localized Prevention Strategy
natural disaster threat and low geographic scope of Quadrant 2 in Figure 3 shows the case of natural
disasters with a high geographic scope and MNEs
with a low geographic scope. While MNEs may
operate in specific geographic areas due to location-
Geographic Scope of Firms
bound FSAs, if the threat of natural disasters with a
Geographic
Scope of Low High large geographic scope is high, reducing disaster
Natural 1 3 threat will likely require more than avoidance. This
Disasters is because it would not be easy for MNEs to avoid
Avoidance Adaptation/Resilience
Low (location choice; risk (supply chain management) risky locations; rather MNEs need to develop their
transfer) prevention strategy at a subsidiary level. Despite
efforts to improve strategic planning, the reality is
2 4 that few MNEs have adopted detailed natural
disaster plans (Oetzel & Oh, 2021). While managers
High Prevention Organized intervention
(risk management) (integrative strategic of MNEs may cite resource constraints as a barrier
planning) to preparing for disasters, the long-term costs (and
forgone benefits) of employing an avoidance
Figure 3 Geographic scope and MNE disaster management approach could be large. Also, since this type of
strategies. MNE relies on location-bound FSAs, a prevention

245
strategy for the threat of natural disasters can focus Resilient organizations are those that can survive
on the MNE’s subsidiaries in specific locations. and cope with disasters with minimum impact and
Given the context specificity of location-bound damage to their operations and employees (Berke &
FSAs and disasters, and resource constraints, it is Campanella, 2006; Cutter et al., 2008). When the
not likely that MNEs can leverage prevention geographic scope of natural disasters is low (i.e.,
strategy in other locations. threat is relatively low) and the MNE uses non-
Disaster preparation requires enhancing organi- location-bound FSAs, MNEs will be able to find
zational flexibility to adjust and scale up as needed, safer locations for their subsidiaries and choose
so that MNEs can respond in a timely manner alternative partners to improve flexibility and
(Vakis, 2006). In addition, subsidiary managers may diversify risk. Since research shows that businesses
need to gather information or knowledge from that serve large regional or international markets
various local stakeholders to understand how a recover more quickly than those that are locally
natural disaster is likely to impact the subsidiary focused (Webb et al., 2000), the ability to diversify
and what the potential impacts are on the MNE. risk geographically is a significant advantage for
Once a disaster occurs, it may be too late to identify MNEs. MNEs can increase their resilience and
appropriate sources of information (bounded ability to adapt to natural disaster threat by estab-
rationality) or develop the relationships needed to lishing alternative and/or flexible supply chains
coordinate effectively with government, non-gov- (Cutter et al., 2008; Hajmohammad & Vachon,
ernment, and other actors as needed (bounded 2016). They may also try to reduce financial
reliability). Thus, establishing multi-sector partner- pressures caused by business disruption. High levels
ships should be a centerpiece of any disaster of leased assets reduce flexibility and increase
prevention strategy. pressure on firms to generate revenue (Zhang
et al., 2009: 42). While MNEs may strive to reduce
Adaptation Strategy inventory under normal conditions, in the event of
Moving to the right side of our 2x2, we focus on a disaster, it may be difficult to replenish supplies
Quadrant 3 in Figure 3 that illustrates the case of leaving global supply chains vulnerable to disrup-
low geographic scope of natural disasters and a tion. The value of increased organizational and
high geographic scope of the MNE. Although the financial slack can help maintain business conti-
geographic scope of disasters is low, an MNE nuity and enable MNEs to engage in stewardship
utilizes and recombines its non-location-bound activities that facilitate disaster relief and recovery.
FSAs across several locations potentially exposing
the MNE to locational disaster threat. In situations Organized Intervention Strategy
where disasters may damage subsidiaries or their Finally, in Quadrant 4, we have the case where the
suppliers in specific locations, and/or temporarily geographic scope of both firms and natural disasters
interrupt firm operations, the entire operation can are high. As such, MNEs are likely to be affected by
be affected. Thus, MNEs need to minimize the natural disasters in multiple locations. In this
potentiality of disruptions and maximize their situation, MNEs develop their non-location-bound
resilience to external threats. Industry differences FSAs and recombine them to improve their perfor-
are also important in considering how to adapt. mance at both the subsidiary- and MNE-levels. This
The ski industry, for instance, is highly vulnerable case is highly complex for MNEs because the types
to droughts and slightly warmer temperatures. of challenges faced by subsidiaries, partners, and
Between 1999 and 2010, the industry lost approx- stakeholders are different in each location. It will be
imately one billion dollars in revenue when the roles of subsidiary level managers to resolve any
demand for skiing dropped substantially due to difficulties they have in each location by collabo-
warmer temperatures and uncertain snowfall (Riv- rating with local stakeholders. Managers will also
era & Clement, 2019; Tashman & Rivera, 2016). need to coordinate and address any issues in their
The retail sector tends to experience significant subsidiaries or with their supply chain partners. In
financial losses after natural disasters while manu- this case, managers at HQs must consider develop-
facturing and construction may experience gains ing an organized intervention strategy that considers
(Zhang et al., 2009: 40). These differences suggest both MNEs as a whole and their subsidiaries,
the need for industry appropriate adaptation partners, and stakeholders. This includes interven-
strategies. ing in various aspects of MNE operations to analyze
and integrate unique challenges from the threat of

246
natural disasters in its various locations and trans- business discontinuity, and arranging to move
form them into its strategic planning and imple- business operations temporarily to another loca-
mentation. One of the goals of this approach is tion, among others (Tierney et al., 2001; Webb
both to prevent and to mitigate the threat and et al., 2000). Once the disaster strikes, established
impact of natural disasters. Recognizing that it is evacuation and business continuity plans may yield
not always possible to avoid all the negative effects dividends. In disaster-prone areas, preparation can
of disasters, managers must also develop coping also be a valuable source of competitive advantage.
skills that may aid in the recovery process. Assuming there is a desire to prepare, in this section
Root causes of disastrous impacts of natural we review how IB research broadly, and NIT
hazards can only be tackled if disaster prevention specifically, inform disaster risk management based
and response are incorporated in both develop- on the programs and tactics described here. We also
ment and environmental strategies (Wijkman & highlight the key disaster management issues for
Timberlake, 1984). To achieve this, an MNE needs MNEs and discuss areas for future research.
to regularly examine the specific challenges faced
by each of its operating units, the unit’s contribu- Research on Disaster Preparedness
tion to other units within the MNE, and the Preparedness is at the core of any effective strategy
functioning of the entire MNE. The MNE should for managing uncertainties. While disaster
develop and implement integrative programs to response and recovery plans are also vital, effective
intervene quickly when its units are (expected to strategies and tactics must be designed a priori, not
be) affected by challenges (Skoufias, 2003). The post hoc disaster. For MNEs, part of preparedness
organized intervention strategy should integrate includes establishing multi-sector partnerships and,
both cost-driven and value-driven approaches. For in many cases, designing alternative supply chains.
the cost-driven approach, because of the high To coordinate with and learn from multi-sector
threat levels, it is necessary to control and coordi- partnerships, improving reliability and trust is a key
nate operations from HQs to improve overall antecedent of natural disaster preparedness. How-
preparation and resource allocation throughout ever, having reliability and trust with multi-sector
an MNE. Doing so will enable the MNE to achieve partners is challenging and cannot be achieved in
high levels of resilience. For the value-driven the short term (Alerts & Mysiak, 2016). Therefore,
approach, because of the importance of non-loca- managers need to find ways to overcome bounded
tion-bound FSAs in MNE’s operations, it requires reliability problems that arise from various sources
value sharing and participation from subsidiaries such as reprioritization, unlearning, and divided
and partners to establish intra- and inter-organiza- engagement (Kano & Verbeke, 2015; Verbeke &
tional reliability in its supply chains. Greidanus, 2009) that hurt managers’ commit-
ments to preparedness. Clearly, more research is
needed on the effectiveness of various risk man-
PREPARING FOR AND MANAGING NATURAL agement activities and crisis management more
DISASTER RISK broadly.
The barriers to effective disaster management
strategies are largely managerial. Managers must Leadership, entrepreneurship, and philanthropy
be aware of and value the importance of disaster in disaster preparedness
preparation and be willing and able to establish risk While organizations have tended to rely on gov-
management programs. Such programs include ernment to address disaster risk (particularly in the
strategies explained in previous sections such as U.S.), even the best public sector organizations face
reaching across sectors to form partnerships that challenges addressing the scale and magnitude of
can be leveraged when needed and building alter- natural disasters. In fact, MNEs are often better
native supply chains, among others. In terms of the positioned to respond to natural disasters than the
specific tactics associated with preparing for and public sector alone given MNEs’ ability to coordi-
responding to natural disasters, firms may under- nate decentralized activities and share knowledge
take a wide variety of activities including (but not effectively and quickly (Sobel & Leeson, 2007).
limited to): conducting an assessment of firm Except for Oetzel and Oh (2021), research on this
vulnerability, establishing a natural disaster topic mainly focuses on firm divestment (Oetzel &
response plan, training employees about natural Oh, 2014; Oh & Oetzel, 2011), corporate social
disaster preparedness, purchasing insurance for responsibility (Tilcsik & Marquis, 2013), and

247
entrepreneurial activities (Williams & Shephard, another. For this reason, various factors such as
2016), as strategic responses to natural disasters and the type of natural disasters, institutional and
their aftermath. cultural norms, and organizational characteristics
However, given the growing, and seemingly could limit the coordination of internal and exter-
unavoidable increase in natural disasters, firms nal activities across borders.
need to transform their business processes proac- As another example, while some firms many be
tively to prepare for natural disasters and to con- affected at the local level, platform-based and
tribute to sustainable development. Such electronic communication businesses are likely to
transformation requires the awareness and experi- be directly impacted by hydrological and geophys-
ence of top executives (Oetzel & Oh, 2021) and ical disasters. This is because these types of disasters
their leadership and entrepreneurship towards sus- can destroy data storage facilities and network
tainability and business continuity. Future research infrastructure. Since platform-based and electronic
should examine how organizational awareness and communication businesses rely less on unique
managerial mindset affect natural disaster pre- location factors and more on connectivity across
paredness and analyze various factors that may different locations, these businesses need to
moderate those relationships. develop non-location-bound risk management
capabilities that can translate across different loca-
Coordination with internal and external activities tions and partners. This requires the extensive
For MNEs and IB, disaster preparedness also orchestration of external activities with other
requires the coordination of various location-speci- organizations such as infrastructure providers, con-
fic and non-location-specific activities. They must tents providers, producers, and other participants
be formed well in advance of a crisis. As one public such as those in logistics, payments, and electronic
official stated at a conference for building disaster device manufacturing.
resilience, once a crisis starts it is too late to make
friends (USCCF, 2019). Thus, one area for future Research on Cross-organizational Collaborations
research is to investigate whether and how an MNE For IB and MNEs, one of the key managerial
coordinates its internal and external activities given challenges is to identify and develop informal
the threat of natural disasters. For instance, high cross-organizational collaborations in disaster-
levels of coordination may reduce both bounded prone areas where the MNE or its subsidiary is
rationality and reliability problems. Coordination located. Partnerships are generally critical for effec-
requires shared goals, knowledge, and capabilities tive firm response to risk since disaster manage-
within MNEs and their various stakeholders. Man- ment efforts are generally too complex for a single
agers must determine whether disaster risk prepa- organization to tackle in isolation (Chen et al.,
ration and management capabilities can be 2013). Cross-organizational collaborations can also
transferred throughout the corporation and its lead to innovative approaches and even new busi-
stakeholders, or whether these capabilities are ness models for addressing these risks (Dahan et al.,
context-specific (Oh & Oetzel, 2017). Ideally there 2010). Building solid cross-sector relationships as
will be some information and capabilities that can described here, is not always easy. Also, assuming
be useful in multiple locations, but other strategies these collaborations are valuable, how should
and tactics may only be applicable in certain managers go about building such collaborations?
locations. A first step is to identify trustworthy partners.
Finding context specificities will enable a deeper
understanding of the factors determining disaster Identifying trustworthy, knowledgeable partners
preparedness. These factors may include industry Despite their value, identifying trustworthy part-
and disaster characteristics as well as conventional ners and collaborators can be challenging. Which
location and firm characteristics.5 For instance, in partners have the relevant information and exper-
the extractive industry, MNEs are often well pre- tise? Are they trustworthy? These are critical ques-
pared for various challenging environments tions since in the case of an emergency like the
because of their exposure to harsh and remote occurrence of a natural disaster, an organization
natural environments and their expertise in engi- cannot experiment with knowledge acquired from
neering and geology (Shapiro et al., 2018). Yet, unreliable sources, of unknown relevance, and
knowledge, learning, and partnerships that are uncertain trust worthiness (Goerzen & Beamish,
valuable in one location may be irrelevant in 2005). Yet, reliable know-how can be difficult to

248
find in rapidly unfoldingly crisis (Waugh & Streib, While managing different stakeholders is chal-
2006). For those MNEs that have trusted relation- lenging, accessing and utilizing complementary
ships in place prior to a crisis, managers may be able capabilities and resources of partners in multi-
to improve managerial decision-making and lower sector partnerships can be an innovative way to
bounded reliability. Given their importance, more increase organizational resilience in the face of
research is needed to understand better how MNEs uncertainties. It is also a way to increase the
find trustworthy partners and what factors make a sustainability of society more broadly. However,
partner trustworthy when preparing for disasters research gaps exist around the issue of whether and
and crises. how MNEs and various stakeholders can effectively
work together and adapt to unsystematic uncer-
Knowledge acquisition through partner diversity tainties. Future research can examine how organi-
While the benefits of multi-sector collaboration zations can draw from and coordinate their
and the value of investing in relationships and trust resources and capabilities in different geographic
building cannot be overstated, it is important to locations to effectively prepare for and respond to
recognize that organizations must engage in an natural disasters.
ongoing search for new insights and knowledge. On the one hand, if the disaster in question
Relying solely on a few sources for information may constitutes a global crisis, such as climate change
create biases in decision-making. There is a danger and/or the COVID-19 pandemic, collaboration
that once organizations establish their processes could be relatively more plausible since the threat
through repeated ideas and actions, it is very is shared. Yet, up until now, even for these threats,
difficult to change these processes quickly in the countries have been reluctant to work together for
face of new knowledge (Walsh & Ungson, 1991). the common good. On the other hand, for local-
Because of the issues noted here, several studies ized, at times catastrophic disasters, organizations
show that high-level partner diversity can improve and stakeholders may find a way to survive in a
problem-solving capacity (Arslan et al., 2021; Beck- global crisis, and they could act in their own self-
man & Haundschild, 2002). Thus, further research interest. Thus, collaborations across organizations
can shed light on whether the diversity of a MNE’s and stakeholders would be more difficult. Future
partners lowers the bounded rationality (improves research could examine characteristics of disasters
managerial decision-making) for managing the and stakeholders that help or hurt collaborations.
threat of natural disasters. Also, it would be valu-
able to know whether a more diverse set of MNE Research on Supply Chain Management
partners improves top managers’ decision-making Natural disasters also provide both challenges and
under the threat of natural disasters. If partner opportunities for MNEs. If affected locations pro-
diversity is valuable, it would then be important to vide unique CSAs, MNEs with strong disaster
know how to control and coordinate such diverse management and preparedness capabilities may
partners and leverage their unique knowledge sets. be able to recombine their internal resources with
Such capabilities could become valuable non-loca- location-bound FSAs such as connecting with reli-
tion-bound FSAs. able local supply chain partners. If similar levels of
CSAs can be deployed in other locations, it may be
Working with stakeholders easier for MNEs to build alternative supply chains.
Research on stakeholder management emphasizes To build a reliable alternative supply chain, MNEs
the value of maintaining good relationships with should have non-location-bound FSAs such as
stakeholders for improving reputations and lower- strategic flexibility and efficient coordination and
ing potential conflicts. The reasons for doing so are control mechanisms over partners in the chain. For
compelling since multi-sector partnerships can take these reasons, more research is needed to increase
on challenges that cannot be tackled by one our understanding of how the reliability and flex-
organization or sector acting alone. Yet, stakehold- ibility of partners, and efficient coordination and
ers in different sectors have different identities and control over partners in a supply chain, may
interests that do not always align with those of positively affect the performance of an MNE facing
MNEs and other stakeholders (Caldwell et al., the threat of a natural disaster.
2017).

249
Geographic decoupling of supply chains chains to be competitive (Gereffi, 2020). This may
MNEs need various input factors from their sub- accelerate the process of globalization (Contractor,
sidiaries and upstream supply chain partners across 2021). A more nuanced and resilient solution
countries. Yet, natural disasters can interrupt var- facing unsystematic uncertainties could be estab-
ious upstream activities including sourcing, logis- lishing regional supply chains (Rugman et al.,
tics, and production. Given that, MNEs may need 2009). MNEs can organize regional headquarters
to recombine and economize on location-bound (hubs) and their supply chains (spikes) in a region
and non-location-bound FSAs of their subsidiaries to increase responsiveness and control. In a case of
and partners. In addition, natural disasters also a catastrophic emergency among regional supply
affect accessibility to downstream activities such as partners, partners in other regions can provide
distribution and inventory management. There- supplies across regions. This requires advanced
fore, MNEs need to prepare to decouple upstream coordinating skills and flexibility of supply chains
and downstream activities, not only in a way to and their partners. Thus, this may keep, if not
lower distance-time costs (McCann, 2011), but also increase, the nature of regional MNEs (Rugman &
to improve their reliability, stability, and continu- Oh, 2013; Rugman & Verbeke, 2004). This can be a
ity. Finding alternative and reliable suppliers for central question in the field of IB.
relationship- and client-specific activities would be
very challenging if MNEs approach them from the Digitalization and resilience of supply chains
view of efficiency. Balancing resilience and efficiency in supply chains
Consequently, MNEs may need to consider would require fundamental changes in supply
establishing their own subsidiaries to improve the chain design and structure. It would be a difficult
stable supply of inputs when faced with unsystem- task for supply chain managers who emphasized
atic uncertainties. Yet, even when managers have cost efficiency. Supplier selection and evaluation
experience with natural disasters and acknowledge needs to assess the reliability and responsiveness of
the importance of developing both location- and partners as well as their cost competitiveness (Kano
non-location-bound FSAs around disaster manage- & Oh, 2020). This requires the involvement from
ment, bounded rationality and reliability can make top managers who should be aware of the impor-
it difficult for managers to coordinate a decoupled tance of unsystematic risks and their impact on
supply chain. Issues to consider when managing supply chains and firm performance. Digitalization
MNE supply chains include: (1) does the geographic enables MNEs to track and evaluate their partners.
decoupling of upstream and downstream activities It also enables partners to join in key strategic
lower the damage MNEs face from (or improve their decisions. Digitalization likely enhances the resi-
resilience against) natural disasters? (2) do better lience of supply chains when they face unsystem-
relationships with supply chain partners improve atic uncertainties. Newer technology such as
MNEs’ preparation for and management of com- blockchain and analytics can help MNEs to provide
plex natural disasters? And, (3) how do MNEs more prompt and complete information to their
transform their efficiency-oriented supply chain supply chain partners (Kano & Oh, 2020; van Hoek,
management models to more reliable and 2020).
stable ones that will likely generate higher costs?
Globalization and deglobalization in supply chains CONCLUSION

Facing growing unsystematic uncertainties, man- In IB, natural disaster is a relatively novel research
agers should find an optimal balance between topic and a unique context to test established
supply chain clustering (agglomeration economies) theories. At the same time, it offers a platform for IB
and geographic spread (risk diversification) on the scholars to contribute to scientific understanding
production side. On the one hand, managers like to using inter- and multi-disciplinary approaches.
take near-shoring and in-market sourcing into their Existing theories and the accumulated knowledge
supply chains to avoid delays and increase respon- of IB research pose both challenges and opportuni-
siveness and control. This may trigger the process ties in analyzing MNEs’ management of and strat-
of deglobalization. On the other hand, natural egy for natural disaster threats, and catastrophic
disasters can occur in any place at any time, thus events more generally. We hope that this perspec-
MNEs need to spread their supply chains to diver- tive piece can be a steppingstone for IB scholars to
sify risks and leverage the benefits of global supply participate in this new area of research and a make

250
3
positive social impact on knowledge around natu- We classify disasters into risk and uncertainty for
ral disaster management. readers who are familiar with Knight’s (1921)
dichotomy of risk and uncertainty. However, it is
important to note that it is not crystal clear to
classify an event into risk or uncertainty because of
ACKNOWLEDGEMENTS
at least three reasons. First, the level of predictabil-
The authors appreciate encouraging and constructive
ity is a relative term. A war (or technological
comments from the Editor-in-Chief, Alain Verbeke,
change) is more predictable than an earthquake,
and three reviewers of the journal. We also thank to
but less predictable than exchange rate risk.
Jorge Rivera, Daniel Shapiro, and Eunsuk Hong for
Second, the predictability of a type of disaster can
their helpful comments on the earlier version of the
be changed over time. For example, drought in the
paper. The authors also thank Shuna Ho for her
Australian outback was reclassified by the govern-
assistance in GIS mapping.
ment from being a natural disaster to being a
manageable risk because it is something farmers
can anticipate and make provision for (O’Malley,
NOTES 2004). Third, the main dichotomy between risk and
1
Still, the fallout from the initial earthquake is not uncertainty is the estimation of the possibility from
over. Recently, Japan announced that it will release statistical calculation. From this dichotomy, uncer-
the contaminated water from the wrecked Fukush- tainty is not estimable or avoidable, and thus it
ima Daiichi Nuclear Power Plant into the sea. If not implies that people cannot prevent or overcome
thoroughly treated, this water will impact human uncertainty. The dichotomy also ignores the ability
health, fisheries, and marine life; not only in Japan to analyze uncertainty from practical experience,
but throughout the Pacific Rim and beyond innovation, inspiration, vision, and foresight. In
(McCurry, 2021). This will likely worsen political this sense, our views on risk and uncertainty in this
tensions in the region, negatively impact the ability paper are closer to some relatively modern views on
of MNEs to operate and manage international uncertainty by Bernstein (1996), Reddy (2006), and
supply chains, and cause another set of cascading O’Malley (2004).
events; all of which were triggered by the original 4
While there is a growing literature that treats
tsunami in 2011. MNEs and business groups as an institutional
2
Teece, Peteraf, and Leih (2016) classify rapid environment, it has little direct relevance to natural
technological change as ‘‘deep’’ uncertainty. How- disasters as unsystematic uncertainties.
ever, compared to the probability of natural disaster 5
We would like to thank one of our Reviewers for
recurrence or its intensity, people know better this suggestion.
about probability of rapid technological change.
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February 26. ABOUT THE AUTHORS
Vakis, R. N. (2006). Complementing natural disasters manage- Chang Hoon Oh is the William & Judy Docking
ment: The role of social protection. World Bank, Social Professor of Strategy in the School of Business,
Protection.
Van Hoek, R. I. 2020. Research opportunities for a more resilient University of Kansas. His research interests include
post-COVID-19 supply chain–closing the gap between non-market strategy, business continuity and sus-
research findings and industry practice. International Journal tainability, and globalization versus regionaliza-
of Operations & Production Management, 40(4): 341–355.
van Hoorn, A., & Maseland, R. 2016. How institutions matter for tion. He has extensively studied multinational
international business: Institutional distance effects vs institu- strategies for managing and valuing various non-
tional profile effects. Journal of International Business Studies, market risks such as natural disasters, technological
47(3): 374–381.
Van Tulder, R., Rodriques, S. B., Mirza, H., & Sexsmith, K. 2021. disasters, political conflicts, and social conflicts.
The UN’s sustainable development goals: Can multinational
enterprises lead the Decade of Action? Journal of International Jennifer Oetzel is Professor of Strategy and Kogod
Business Policy, 4(1): 1–21.
Verbeke, A. 2003. The evolutionary view of the MNE and the IB Professor in the Management Department at
future of internalization theory. Journal of International Business American University in Washington, D.C. Her
Studies, 34(6): 498–504.

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research focuses on the competitive implications of the management of business risk in conflict-af-
social, economic, and environmental sustainability fected countries.
challenges. She also studies business response to
climate change, particularly natural disasters, and
Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional
affiliations.
Accepted by Alain Verbeke, Editor-in-Chief, 7 September 2021. This article has been with the authors for two revisions.

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Journal of International Business Studies (2022) 53, 231–254

ª 2021 Academy of International Business All rights reserved 0047-2506/22

Multinational enterprises and natural

Chang Hoon Oh1 and Abstract

Keywords: natural disasters; COVID-19 pandemic; multinational enterprises; internal-

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Human Induced Disasters

Figure 2 Types of disasters and human involvement.

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Table 1 Applicability of IB theories in explaining systematic and unsystematic uncertainties

IB theory/view Key ideas to IB research (Un) Applicability in explaining uncertainties

Systematic uncertainties Unsystematic uncertainties

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level (or sub-national-level) political, economic, Other relevant theories

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Globalization and deglobalization in supply chains CONCLUSION

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