Political Risk and Firm Exit: Evidence from the US-China Trade War

46 Pages Posted: 13 Sep 2021

See all articles by Samantha Vortherms

Samantha Vortherms

University of California, Irvine

Jiakun Jack Zhang

University of Kansas

Date Written: September 2, 2021


Does international conflict induce foreign firms to “follow the flag” and exit from a profitable market? We show that the US-China trade war broadly elevated political risks for multinational corporations (MNCs) operating in China, increasing firm exit overall. However, investment treaties can mitigate political risks at the country level while firm entrenchment determines resilience to risk at the firm level. Using a new dataset on all foreign-invested firms registered in China between 2014 and 2019, we implement difference-in-difference and triple-difference models to isolate the impact of increased political risks on MNC exit in the context of the US-China trade war. Our findings show that US and allied firms were not more likely to exit China, suggesting that foreign direct investment outflows do not "follow the flag." Instead, firm exit is determined by the balance of heightened political risks against the availability of firm-level and institutional resources to mitigate these risks.

Keywords: international political economy, trade, foreign direct investment, fdi

Suggested Citation

Vortherms, Samantha and Zhang, Jiakun Jack, Political Risk and Firm Exit: Evidence from the US-China Trade War (September 2, 2021). 21st Century China Center Research Paper No. 2021-09, Available at SSRN: https://ssrn.com/abstract=3916186 or http://dx.doi.org/10.2139/ssrn.3916186

Samantha Vortherms (Contact Author)

University of California, Irvine ( email )

P.O. Box 19556
Science Library Serials
Irvine, CA California 62697-3125
United States

Jiakun Jack Zhang

University of Kansas ( email )

Lawrence, KS 66045
United States

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