Geopolitical Risk and Corporate Behaviors: Propagation of shocks through global operations

This study examines the impact of geopolitical risk (hereafter GPR) on the behavior of multinational manufacturing firms from Japan. We construct firm-level exposures to GPR indices using data on foreign direct investment and international trade. We find that only large firms respond to GPR, whereas small firms exhibit no significant reaction. Furthermore, the effect of GPR on accounting-based decisions, such as cash holdings and investment, varies depending on firms’ modes of internationalization. In particular, the results indicate that firms exposed to GPR through FDI reduce asset-side variables, such as cash holdings and capital expenditures.