Maryland Smith Research / November 10, 2022

How COVID-19 Showed the Cost of Doing Business Globally

How COVID-19 Showed the Cost of Doing Business Globally

Prior to the COVID-19 pandemic, multinational companies didn’t have to think twice about increasingly moving toward firm globalization. But the crisis amplified the vulnerabilities of doing business across borders. And now, new research from Maryland Smith is contextualizing the numbers to show the potential dark side of globalization.

Maryland Smith’s Lemma Senbet, The William E. Mayer Chair Professor of Finance at the University of Maryland’s Robert H. Smith School of Business worked alongside co-authors Omrane Guedhami from the University of South Carolina, April M. Knill of Florida State University and William L. Megginson, University of Oklahoma, to produce the paper, published in the Journal of International Business Studies.

Together, they studied a sample of firms from 73 countries over the period of January to December 2020. Specifically, they examined the daily stock price values of multinational corporations and domestic companies, referred to in the text as MNCs and DCs respectively, and their fluctuations based on the pandemic’s effects.

Previous literature has suggested that in times of crisis MNCs are better positioned to weather the storm in comparison to DCs. However, it’s actually the opposite that holds true, the researchers said. Firms operating across multiple countries and relying on international supply chains were found to be especially susceptible to the pandemic’s devastating effects.

The researchers relied on the stock price performance of firms before, during and after the initial pandemic-induced stock market drop in each country, while noting important pre-2020 firm-specific characteristics like size, profitability, asset risk, stock liquidity and pre-crisis returns, among other factors. They found no indication of MNCs showing significantly different performance levels in the months leading up to the pandemic. But during the crisis period, MNCs were shown to have roughly 1.7% lower returns. Following the crisis period, MNCs did not recover from their underperformance by the end of the sample term in December 2020.

“Our core findings are robust to using alternative proxies for internationalization, to using daily returns, to including various fixed effects, and to using a matching technique to account for differences in characteristics between MNCs and DCs,” they write. “Overall, these results suggest that internationalization can have a dark side during a tail-risk event, such as a pandemic.”

Notable cross-country factors impacted by the pandemic that the researchers took into account while gathering the data include industry characteristics, the level of a country’s financial and economic development, as well as government responses to the pandemic.

No industry was affected equally by the pandemic. Areas such as tourism and hospitality, financial markets and transportation experienced severe adverse effects. Other areas, like healthcare, food delivery services and online retail felt less negative impact or potentially experienced more financial success in comparison to pre-crisis figures.

The crisis-period valuation gap between MNCs and DCs is generally increasing in the strength of government responses to the pandemic, the researchers write. China, in particular, which imposed strict quarantine regulations and shut down firm operations, saw its economy rebound to a level 2.3% larger than year-end 2019 after having experienced a crunch during the crisis. In contrast, Sweden, which took a less aggressive approach to containment, saw the virus surge and ultimately cause prolonged economic damage.

In terms of the post-crisis recovery period, countries such as Israel, Britain, and the U.S., moved into faster recovery than other developed and developing countries, due to their vaccine approvals at the end of 2020.

The paper’s findings, the researchers write, should be of great interest to top executives of MNCs as they prepare for the next global crises. Leaders would benefit from understanding the aspects of industries, businesses and governments that aided financial recovery, as well as the steps they can take to ensure their firm’s financial stability amidst uncertainties in the future.

“As we eventually emerge from the pandemic, managers of MNCs may make structural decisions that reflect less vulnerability to large-scale crises,” they write. “They may also bring some business functions that were previously outsourced within the firm itself, to maintain control over vital aspects of the firm.”

Read more: “The Dark Side of Globalization: Evidence from the Impact of COVID-19 on Multinational Companies”, in the Journal of International Business Studies.

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