How are the ongoing tensions in geopolitical relations affecting firms' foreign investments?

Geopolitical risk has emerged as an important factor in foreign investment decisions in recent years. The rise of geopolitical tensions worldwide and the fragmentation of relationships between countries have introduced new dimensions to foreign investment risks. We study the propensity for sudden and unpredictable shifts in the political relationship between countries—that is, volatility of political affinity in their bilateral political relations—and its effect on firms' foreign subsidiary investments. We show that volatility of political affinity negatively affects the number of subsidiaries, employees, and local sales in the host country because when bilateral relations change suddenly, it is more difficult for multinational firms to predict how stakeholder behavior will impact the performance of their investments. LINK