Conference abstract :
Following a sudden increase in geopolitical tensions between two countries, dyadic foreign investment declines. We shift the analytical focus from a dyadic to a multi-country perspective and argue for a substitution effect wherein foreign investors from other third countries fill the ensuing void. Building on research on competitive strategy, we expect firms from third countries with greater pre-existing investments in a given industry to leverage market and political advantages and exploit opportunities created by a geopolitical shock. We validate our hypotheses using India’s inward M&A transactions from 2016 to 2023. Following a sudden increase in geopolitical tensions with China in 2020, Chinese investments declined. We identify opportunities for third-country firms based on the difference between counterfactual and actual Chinese investments in an industry and find support for a substitution effect. Firms from countries with higher pre-existing share of investments in India were more likely to invest in industries that offer market opportunities because of the post-shock withdrawal of Chinese firms. In taking a multi-country perspective, we contribute to the international business literature by showing that the effects of rising geopolitical tensions between two countries may extend to investments from third-party countries.
