How Support Networks Enable Firms to Weather Natural Disasters
Then why are companies foregoing the risk and expanding into a region that has a history of natural disasters? Earthquakes in Sichuan province—one of the largest economic centers in western China—cost more than $16 billion alone in 2013.
“The evidence clearly shows that natural disasters can wreak havoc on a company’s bottom line, yet new investments continue to be made in these regions,” Associate Professor Jennifer Oetzel said. “[We knew] something was making it possible for managers to justify these expansions.”
Oetzel set out to decide what the threshold of risk management was and what parameters deter- mined it, with co-researchers Chang Hoon Oh, from the Beedie School of Business at Simon Fraser University, and Canfei He, at the College of Urban and Environmental Studies at Peking University.
Oetzel and her co-authors discovered that having a pre-existing network of support in place makes the difference.
Companies are much likelier to expand when they already have a footprint—for instance, a US-based hospitality company with existing hotels in the province. Increased expansion is also seen from other US-based companies in different industry sectors—say, a construction manufacturer—that see the hospitality firm has subsidiaries in the province. That is, provided they are not direct competitors.
“The bigger that support network is, the more likely [a firm] is to continue to expand, regardless of the disaster rate,” Oetzel said.
The researchers used geographic information software to map Chinese census data on the locations of foreign subsidiaries from 285 companies, as well as disaster information from the Center for Research on the Epidemiology of Disasters, headquartered in Belgium.
The final sample included 107,921 observations on firms’ presence, natural disasters, and geo-demographic information at the province level between 1955 and 2008. The 285 companies have headquarters in North America, South America, Europe, and Asia, and have subsidiaries in 22 Chinese provinces.
The team was able to pinpoint how close a natural disaster’s epicenter was to a corporate structure, and the population density impacted by each disaster, creating a visual representation of thousands of data points.
“Being able to combine so many types of data into one final product was astounding,” Oetzel said. “[Mapping] technologies are very powerful for research like ours.”
What the researchers saw proved that despite severe natural disasters, which impacted large populations in certain regions, firms continued to expand into provinces where they already had subsidiaries.
“Our findings show that having some sort of in-country support, some sort of institutional knowledge, seems to balance the risk of natural disaster,” Oetzel said. “And the larger the in-country network is, the more likely a company is to expand.”
But what exactly that institutional knowledge is remains to be seen.
“We can tell from the numbers that some sort of knowledge is being shared; we just can’t define what that knowledge is yet,” she said. “But that’s definitely the next step.”
EXPECTING THE UNEXPECTED
Through a grant from the Canadian government, Oetzel and her co-researchers are developing a survey for top-level managers to discover how this networked knowledge shapes disaster management.
“People and corporations are more vulnerable than ever to natural disasters; the data proves that,” Oetzel said. “Rapid urbanization and the growth of even bigger megacities, coupled with the increase in natural disasters, means everyone needs to have better disaster management plans.”
While they are still focusing on multinational firms with a presence in China, they believe all companies will be able to employ the findings.
“By uncovering exactly what it is these networks provide, companies in China, Africa, the Middle East, and the US can be more prepared to face natural disaster,” she said. “And everyone can benefit from that.”
“Intra- and Inter-Organizational Learning and Firm Response to Natural Disasters,” Chang Hoon Oh, Jennifer Oetzel, and Canfei He, is a Best Conference Paper for Practice Implications nominee at the 34th Annual Strategic Management Society conference, Fall 2014.