Intra-firm Networks during the COVID-19 Pandemic

This study empirically investigates the impact of COVID-19 severity on the quarterly performance of Japanese overseas affiliates from 2020 to 2022, focusing primarily on sales. In particular, we highlight the role of intra-firm networks, specifically the presence of nearby affiliates under the same parent company, in mitigating the adverse effects. We find that higher local COVID-19 severity significantly reduced total sales, with the negative impact being most pronounced during the initial phase; conversely, Japanese affiliates rarely reduced employment. We also find that, on average, intra-firm networks within the same region did not necessarily mitigate the negative effects of local pandemic severity. However, we detected such mitigating effects among affiliates in East Asia with sibling affiliates in less-affected countries of the region during the initial year. This was largely because they could more easily benefit from the positive aspects of network effects (e.g., switching input sources) within the dense production networks spanning multiple countries in the region, taking advantage of variations in the timing and level of pandemic severity across those countries. Additionally, affiliates in East Asia experienced negative supply chain spillovers from the pandemic’s severity in input-source countries during the initial year, reflecting the extensive cross-border nature of these chains.