17693: Judicial Local Protectionism Curtailment and Customer Concentration: A Quasi-Natural Experiment (session 25576)

The literature on factors influencing customer concentration generally assumes a stable legal environment. This assumption leaves it unclear how a sudden curtailment in judicial local protectionism—caused by a policy shock that disrupts the legal environment—affects firms’ customer management strategies. This study answers this question by investigating how the curtailment of judicial local protectionism affects the customer concentration of a supplier. Drawing on insights from bargaining power theory, we propose that judicial local protectionism influences the bargaining power risk faced by the supplier, thereby shaping their relationships with major customers. Using a staggered Judicial Reform aimed at reducing local protectionism in various regions of China as a quasi-natural experiment, we find a statistically significant negative relationship between the curtailment of judicial local protectionism and customer concentration of the supplier. Our analysis reveals that this effect is more pronounced for the concentration of non-local customers than for the concentration of local ones. Furthermore, DuPont analysis indicates that the reduction in customer concentration is primarily driven by suppliers proactively reallocating sales from major customers to non-major ones, rather than being a result of overall sales growth initiated by customers. We further reveal that this negative relationship is stronger for firms with lower market power, higher R&D capacity, or located in regions with higher levels of corruption. In addition, a less concentrated customer base enhances firm performance to a greater extent after judicial local protectionism curtailment. Overall, our findings suggest that suppliers respond to major customers’ increased bargaining power risk, triggered by the curtailment of judicial local protectionism, by reducing their customer concentration, which eventually contributes to supplier performance.

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