Conflict Exposure and Firm Investment: Evidence from the 2022 Russia–Ukraine War

Abstract

We introduce a novel measure of firm-level exposure to armed conflict that captures operational disruptions due to localized military activity. Our framework integrates three granular components: static regional vulnerabilities to targeting and occupation, dynamic geocoded reports of military incidents and territorial control, and each firm's pre-conflict establishment-level workforce distribution across affected regions. This approach provides time-varying measures that quantify how localized conflict shocks propagate through multinational firms' operational networks. Applying this framework to Russia's 2022 invasion of Ukraine across multinational firms in 44 countries, we document that higher conflict exposure reduces market valuations and capital expenditures while simultaneously increasing R&D spending. This compositional shift reveals that extreme geopolitical shocks trigger strategic reallocations from physical to knowledge-based capital rather than uniform retrenchment. U.S. firms exhibit sharper investment responses than non-U.S. counterparts facing identical conflict exposures, suggesting that institutional and market structures shape how firms adapt their investment strategies under extreme operational disruptions. 

Keywords: Geopolitical Risk, Firm Valuation, Ukraine, R&D Spending, Innovation, War, Investment, Capex, Multinational Firms

JEL Classification: D74, D81, F51, G31, O32