Study: Hedging by Hiring: Executive Composition and Compensation Responses to Trade Shocks

Chinese firms hit by the U.S.-China trade war are increasingly hiring executives with international experience to help manage adversity, particularly those skilled in European markets and marketing, according to new research from the University of Michigan.

With U.S. tariffs rising and trade relations becoming strained, these firms are seeking leaders who can provide the strategic insight necessary to adapt to a shifting global landscape and pursue alternative markets for growth.

The research, which examined 3,440 Chinese public firms, shows that with exports to the U.S. declining, Chinese firms appear to be focusing on the European markets as a primary alternative. After trade war-related tariff increases, exports to non-U.S. countries-especially the European Union-saw moderate increases.

Leaders with European experience offer valuable knowledge and networks, enabling firms to build new buyer-supplier relationships and expand sales channels in unfamiliar markets. Marketing skills are particularly in demand among these hires, in contrast to management, finance or other areas, reflecting a focus on strengthening customer engagement in alternative markets and cultivating brand loyalty abroad.

"Chinese companies are pivoting to leaders who understand the complexities of foreign markets, especially the European market," said Jagadeesh Sivadasan, professor of business economics and public policy at U-M's Ross School of Business. "Their expertise is particularly valued for helping firms navigate the challenges of sustaining operations and expanding in non-U.S. markets."

The study highlights that firms that heavily rely on foreign markets increased the proportion of executives with international experience more significantly than firms with limited foreign exposure. Additionally, since companies need to leverage executives' foreign networks and professional experiences to deal with crises in the overseas markets or enter a new export market, executives who have worked abroad are valued more than those who returned to mainland China after studying abroad.

The research also found that executives with international backgrounds, especially those with European experience, received higher equity-based compensation compared to their locally focused peers. This compensation structure, which ties earnings to company performance, reflects firms' reliance on these executives to stabilize and grow international revenue streams. These executives, according to the research, indeed played a strategic role by not only helping their firms to increase revenue streams, but also establishing and expanding foreign subsidiaries, which included growth in both the size and the number of subsidiaries. Building foreign subsidiaries has proven to be an effective response to tariffs on exports, as this approach allows firms to shift production away from China, reducing the impact of trade restrictions on Chinese exports.

The importance of these internationally skilled executives was underscored by stock market responses to their departures. The study reports that companies faced sharper declines in stock value following the unexpected departure of executives with foreign expertise during the trade conflict period, indicating investors' confidence in the value these leaders bring.

The stock market's negative reaction suggests that investors view executives with foreign experience as critical assets for firms affected by tariffs, a sentiment that reflects the growing importance of human capital in managing global economic disruptions.

"Executive human capital proved essential in helping firms navigate the challenges posed by adverse trade shocks," Sivadasan said. "The presence of leaders with foreign experience enabled companies to stabilize and grow internationally, even as tariffs disrupted traditional trade channels."