The effects of home country political risk and uncertainty on the financial performance of firms

European Journal of International Management

We evaluate the effects of home country political risk and uncertainty on MNCs’ financial performance, examining firms from countries with different development levels. We also test the differences in the impulse response function, considering firms’ technology intensity levels. Examining 1415 firms in ten different sectors of the economy and from 37 countries from 2007 to 2019, we test a Panel Vector Autoregressive (PVAR) model. The results show that responses to political risk and uncertainty shocks depend on the type of economy in which the firm is located and the technology intensity of the industry sector. We contribute to the literature by empirically distinguishing between political risk and uncertainty. We advance the institutional country-of-origin perspective by showing that while political risk can be managed from a stable, secure and robust institutional context, the negative effects of uncertainty on MNC performance cannot be mitigated through a strong and highly developed institutional framework.