Gon Char Greve 2022

Economic Systems xxx (xxxx) xxx
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Economic Systems
journal homepage: www.elsevier.com/locate/ecosys
The impact of political risk on FDI exit decisions

Ksenia Gonchar a, 1, Maria Greve b, *, 2
a
Institute of Industrial and Market Studies, National Research University Higher School of Economics, Moscow, Russia
b
Faculty of Economics and Business Administration, Friedrich Schiller University, Jena, Germany; Faculty of Economics and Business, University of
Groningen, The Netherlands
A R T I C L E I N F O A B S T R A C T
JEL classification: Do political risks drive exit decisions by multinational companies (MNC)? What mechanisms can
E02 protect a multinational subsidiary in a host country that is characterized by weak institutions and
E61 high political risks? Using multinational plant-level data for Russia in the period 2000-2016 and
F21
applying the Cox proportional hazard model, we find significant effects from elevated host-
F23
L10
country political risk when we compare the year of entry to the year of exit. MNCs are particu
P26 larly sensitive to problems associated with law, order, and social conditions in Russia and the
presence of the military in politics in the home country. Institutional similarity does not reduce
Keywords:
exit the hazard of exits, and MNCs from high-risk countries exit less when home-country risk in
foreign subsidiary creases. Subsidiaries from countries that have imposed sanctions on Russia are less likely to exit,
multinational company (MNC) though sanctions interact with host-country risks, making them more severe. Being large and
political risk being part of a greenfield project help subsidiaries to build resistance against host-country po
Russia litical risks. These findings provide empirical evidence that support our conclusions regarding
survival foreign direct investment volatility in countries with high risk.
transition economy
1. Introduction
Since the global financial crisis in 2008, the cumulative stock of foreign direct investment (FDI) in Russia has decreased, and FDI
inflows have been fragile. According to the World Investment Reports (UNCTAD, 2015-2020), new FDI flows to Russia nearly dried up
in 2015, and, hampered by trade restrictions imposed on by trading partners and Russia since 2014, were slow to recover afterward.
Many high-profile and large-scale divestment have been reported. For example, ConocoPhillips sold its oil and gas assets and left
Russia (Financial Times, 2015). General Motors closed its St. Petersburg assembly plant and took a $600 million write-off soon after US
sanctions were imposed on Russia in 2014. (Fortune, 2015). The Russian government forced Shell to concede 35 percent of its stake in
the Sakhalin-2 project to Gazprom, a local energy group (Guardian, 2006). At the end of 2019, work was halted on the Nord Stream 2
natural gas pipeline project, even though 94 percent of the pipeline was complete, because European companies involved in the project
were threatened with penalties by the US (BBC News, January 21, 2021).
At the same time, after the partial privatization of Alrosa and Rosneft, in diamond mining and oil companies, respectively, several
landmark FDI entries took place. Multinational corporations (MNCs) that increased their operations in Russia, included BP,
* Corresponding author.
E-mail addresses: kgonchar@hse.ru (K. Gonchar), maria.greve@uni-jena.de (M. Greve).
1
ORCID 0000-0002-3059-6023
2
ORCID 0000-0001-5855-9753
https://doi.org/10.1016/j.ecosys.2022.100975
Available online 31 March 2022

0939-3625/© 2022 Published by Elsevier B.V.
Please cite this article as: Ksenia Gonchar, Maria Greve, Economic Systems, https://doi.org/10.1016/j.ecosys.2022.100975
K. Gonchar and M. Greve Economic Systems xxx (xxxx) xxx
ExxonMobil, Glencore, Daimler, and Schlumberger. Schlumberger purchased 51 percent of the Eurasia Drilling Company (EDC), but
the Russian government declared that Schlumberger’s operational and ownership control of EDC could be reversed if the US intensifies
sanctions (Kommersant, 2018).
Our study analyzes the influence of political risk on exit decisions by MNCs. The literature tends to focus on the influence of
political risk on choice of entry location, rather than on exit decisions. We expand the research on politically troubled markets by
analyzing the factors that increase or decrease the length of stay by an MNC. Our exit analysis not only highlights the effects of risks on
exit during various periods and distinguishes between the exit strategies of genuine and round-tripping3 MNCs, we also incorporate
relations between the home and host countries, including the effects of political distance, the imposition of sanctions, the existence of a
bilateral investment treaty, and the impact of political risk in the home country.
All MNCs face political risk, especially when firms from countries with weak institutions interact with counties that have strong
institutions (we refer to these country groups as “South” and “North,” respectively). Although the decision to divest has its own risks
and costs, MNCs that are more sensitive to political tension might choose this path. If policy makers want to maintain FDI, it is
important for them to gain a better understanding of behavior by MNCs in order to design measures to prevent exits and to protect the
jobs, business activity, and technology learning that are associated with FDI. From the perspective of businesses, it is important to spot
the drivers of divestment that sometimes make exit unavoidable.
The main outcome that we seek to explain in this paper is exits, which is a company’s decision to liquidate or sell a subsidiary in a
host-country market. Thus, unlike Dunne et al., 2003, we are not studying the mortality of plants but, rather, decisions to stop pro
ducing in Russia. Our chief explanatory factor is political risk. We assess the political risks and constraints that arise from changing
political and governance environments and might affect a company’s operations and profit in the host and home countries.
Five main research questions are studied: (1) How does political risk in host and home countries affect the decision to exit, and does
it vary over time and across industries? (2) Which types of political risk are most likely to explain exits? (3) Does the effect of political
risk on exit depend on political differences between the home and host locations? (4) Have sanctions catalyzed the effect of political
risks? (5) What mechanisms protect MNCs from a host country’s political environment and make them less likely to exit?
In line with the industrial organization and institutional literature, and the real options concept, we hypothesize that MNCs that
operate in Russia are, to some degree, tolerant of political risk, therefore, the exit decision is influenced by a perceived increase in risk.
MNCs originating in home countries with a strong institutional framework experience lower political risk and may be more risk averse
than companies familiar with a weak institutional environment. At the same time, some MNCs may have better resource capabilities
that enable greater resilience to the higher costs associated with higher risk. Because of these possible variations, we have no firm
expectations regarding similarities or differences in the respective political environments. We do, however, expect that larger sub
sidiaries, local partnerships, or bilateral investment treaties increase the bargaining power of an MNC and protect it from a host
government’s political challenges, as well as pressures from the home country.
Because Russia has high levels of instability but is also endowed with natural resources and a large domestic market, it is an
appropriate empirical setting for studying the effects of political risks on multinational exit behavior. Certain financial difficulties and
limited freedom caused by sanctions place constraints on Russian authorities in their relations with MNCs. Divestments of various
kinds have taken place in practically all industries, and some instances of direct expropriation of foreign firms have occurred. For
example, immediately after the annexation of Crimea in 2014, more than two hundred Ukrainian firms were expropriated on the
pretext of “unfair prior privatization” (RIA (News, 2015)).
Our empirical analysis shows that foreign MNCs are highly vulnerable to an increase in political risk, which motivates market
withdrawal. This effect is relevant mostly for investors in mining, construction, and services. MNCs are particularly sensitive to
problems associated with law and order in Russia and military involvement in politics and conflict in the home country. Political
similarity does not tend to make MNCs from developing countries “weather the storm” better. When political distance increases,
Southern MNCs exit slightly less, though this pattern is driven mostly by political troubles in the home location. Subsidiaries from a
state imposing sanctions are less likely to exit, and the impact of host-country political risk is stronger for MNCs headquartered in states
that imposed sanctions. Various structural factors might shield foreign subsidiaries from political problems and create greater resis
tance to exits: the size of the subsidiary, greenfield projects, and joint ventures with local partners. Interestingly, the market selection
mechanism seems to become less efficient when the institutional environment deteriorates.
In Section 2, we outline the literature that inspired our study. Sections 3 and 4 describe the data and our empirical strategy,
including the construction of dependent and explanatory variables. Section 5 reports the empirical results, and Section 6 concludes.
2. Literature overview and our contribution
2.1. Theoretical background
Our paper draws primarily on two main families of theories. The first one explains the decision of the firm to exit the market. The
second explains the effects of political risk on multinational behavior.
Industrial organization literature focuses on the exit process and suggests that exits reflect productivity shocks that generate un
certainty (Dunne et al., 1988; Li, 1995; Caves, 1998). However, MNCs do not immediately exit when costs increase. Real options theory
3
Companies established by Russian investors using tax havens and financial hubs.
2
literature (Dixit, 1995; Dixit and Pindyck, 1994) shows that sunk costs influence exit decisions. If an MNC cannot divest without costs,
deferring the decision to exit enables it to learn more about the uncertainties ahead. This model predicts that postponing a final
decision is the optimal strategy under conditions of uncertainty and leads us to suggest that the decision to exit depends on internal or
external challenges. Large subsidiaries, for example, may have sizable sunk costs, increasing the probability that the MNC will not exit
(Dial and Murphy, 1995).
Another stream of literature focuses on the effect of political risk on FDI. Increased political risk and a weak institutional setting
may cause defensive FDI divestment driven by higher costs and reduced profits (North, 2017). Higher costs may be caused by sub
optimal investment decisions and excess capacity in an insecure environment. Reduced profits may stem from the appropriation of
intellectual property or the loss of productivity advantages caused by the limited ability to transfer technology (Janeba, 2000;
Schnitzer, 1999). Political violence and problems with the judiciary threaten the safety of property rights. To sum up, political risk
affects FDI decisions (Busse and Hefeker, 2007), though in most cases this kind of risk interacts with specific MNC and market factors
(Wei et al., 2007).
MNCs have varying tolerance for and perceptions of acceptable levels of political risk. MNCs that originate in developed countries
have a different threshold of political risk from those originating in developing countries (Deseatnicov and Akiba, 2016). Thus, the
probability of an MNC exit depends on whether the political risk exceeds an acceptable level. MNCs from the “North” are more tolerant
of political risk in developed countries than in developing countries, especially if the overall level of stability in a developed host
country meets their needs (Peng and Beamish, 2008). This nonlinearity in the impact of risk on entry and exit decisions is demonstrated
by Zhu et al., (2019), who show that in emerging countries, government instability deters entry but does not affect exit. However, in
countries with a high overall political risk index (above the sample mean), government instability significantly contributes to exits.
Yasuda and Kotabe (2021) argue that MNCs have specific reference points that depend on perceptions of the level of political risk in
both the home and host countries, and this reference point determines the behavior of an MNC when political risk increases.
The extent to which political risk affects exits may be conditioned by the type of goods and services produced by MNCs and by the
nature of the risk. Kim and Kung (2017) suggest that investment irreversibility, or the extent to which assets have alternative uses,
explains the differentiated impact of risks across industries. For firms with highly irreversible assets, the cost of disinvestment may be
too high, lowering the probability of exiting. Companies that deal with energy and natural resources (Sottilota, 2016) or complex
goods or services (Dixit, 2011) are especially vulnerable to such risks. García-Canal and Guillén, 2008 find that MNCs in regulated
industries prefer to operate in politically risky countries because of the high profits in a less competitive environment and therefore are
immune to political risk. Barbopoulos et al., (2014) report that MNCs that originate in the UK and operate in emerging countries with
high political risk and corruption ratings have the highest returns for shareholders. Certain types of political risk increase the prob
ability of an MNC exit. For example, when internal conflict in a host country increases the cost of safeguarding investment to an
unacceptable level, MNCs are likely to exit (Dai et al., 2013).
The differentiated response of MNCS to political risk also depends on the environment in the home country and the degree of
political similarity between the home and host countries. A literature survey by Dixit, 2011 discusses two competing scenarios. In the
first scenario, superior technologies and liquid capital reserves give MNCs from the North advantages that increase their resistance to
political risk. The second, competing scenario suggests that MNCs from the South have the advantage of experience working in risky
environments and are better equipped to navigate regulatory obstacles. MNCs operating in host countries that have similar political
and cultural environments also have lower transaction costs because of less-codified contracts (Holburn and Zelner, 2010). Cuer
vo-Cazurra and Genc, 2008 report that southern MNCs are widespread in developing countries, where institutional similarities may
give them an advantage, especially if the host country has lower regulatory levels and higher levels of corruption than in the home
country. This suggests that MNCs from emerging countries are more likely to tolerate risky markets than MNCs from developed
countries (Aleksynska and Havrylchyk, 2013; Satyanand, 2011). Perhaps the advantages of superior technologies and capital reserves
are less beneficial than environmental and experiential similarities.
Another channel that may mitigate and explain the differentiated response to political risk is discussed in resource-based literature.
Moon and Lado, 2000 suggest that MNCs operating in certain countries have bargaining power relative to the host government that can
generate economic rents and lead to superior performance. Such MNCs are less likely to be affected by government intervention. This
bargaining power may stem from embedded social and economic relationships established by the MNCs with local actors that include
business partners and government agents (Granovetter, 1985). For example, joint ventures may be more resilient if a local firm is
affected and divestment is costly for the host government (Henisz, 2000). This literature establishes that joint ventures are more
successful in environments characterized by high uncertainty and governance problems (Kogut and Singh, 1988) and that MNCs can
minimize their political risk through partnerships with resident firms. Nocke and Yeaple, 2007, however, favor wholly owned sub
sidiaries in institutionally weak locations, because greenfield investment is systemically more efficient than cross-border acquisitions.
Our analysis includes a discussion of the interaction between political risk and sanctions. The literature views sanctions as a po
litical act that reinforces the effect of political risk on the behavior of MNCs (Sottilotta, 2016). Because sanctions are an informal
institution and outside the purview of MNCs, decisions to obey or challenge sanctions are nuanced and include matters of dependence,
economic necessity, and reputation (Weber & Stepien, 2020). The consequences of these decisions are also difficult to predict. Lektzian
and Biglaiser, 2013 report a significant increase in global FDI when US firms divest in response to US sanctions, providing the target
country with a reliable source of capital replacement.
2.2. Our contribution to the literature
Several empirical studies are relevant to our analysis. Lankes and Venables, 1996 show that political risk increases the likelihood of
3
FDI project termination in transition economies. Using data on Japanese multinationals, Dhanaraj and Beamish, 2009 demonstrate
that increased political openness increases the longevity of international joint ventures and reduces exits from greenfield investment.
Components of political risk may interact. For example, good governance in a host country reduces the likelihood of MNC divestment
in response to terrorist attacks (Oh and Oetzel, 2011). Cuypers and Martin, 2010 report that divestment may be caused by changes in
exchange rates, demand, and institutions. Cultural similarities also reduce the likelihood of exits (Sousa and Tan, 2015).
Our study contributes to this literature in several ways. First, our consideration of the stylized fact that MNCs anticipate some level
of political risk when entering the markets of developing and transition countries includes changes in political risk and political
distance, rather than just political risk scores. Second, we show that the effect of risk on exits depends on the time, product type, and
investor. Third, we analyze changes in the risk environment of the home country and document that an increase in home risks affect
northern and southern MNCs differently. Additionally, we show that growing institutional risks may contribute to lower efficiency in
the firms’ selection mechanism when loss-making firms delay their exit.
Our analysis focuses on Russia, and some other studies deal directly with the interaction of risk and multinational behavior there.
Johns and Wellhausen, 2016 use survey data from executives at US MNCs operating in Russia to model the effect of economic links and
the subsidiary’s value on the MNCs’ level of exposure to expropriation risk. Expropriation risk is measured as current and future
concerns about a breach. They test three different forms of economic and political links: share of local suppliers, joint ventures, and
business links with state-owned enterprises. They find that having domestic suppliers reduces the probability that the host government
will renege on its commitments and argue that this local supply chain builds informal property rights that shield MNCs from adverse
government treatment compared to MNCs that operate in isolation. Weber and Stepien (2020) study the adjustment strategies of
multinationals to the European Union (EU) sanctions on Russia using a recent survey of parent companies that have subsidiaries in the
country. Their result confirms that nonfungible assets, as well as a company’s dependence on the sanctioned market, lower the
probability that a company will reduce its activities in Russia and comply with sanction laws.
Gurkov et al., 2017 rely mostly on qualitative data on “significant industrial projects” from 2015 to 2017 to study industrial in
vestment and divestment or enlargement of existing facilities in Russia. They find that investment projects for political reasons are
rarely terminated. Most terminations or decisions to close plants (sixteen cases) were motivated by poor demand conditions or the
advanced age of joint ventures. They note that large severance payments made most divestments very costly and could be afforded only
by very large parent corporations. In another case study of exits in Russia, Gurkov and Saidov, 2017 report that the exit rate of MNCs is
lower than might be expected, considering the severity of recent political and economic instability. They suggest that negotiations
between MNCs and the host government as well as low asset liquidity may explain this lower-than-expected exit rate.
We expand on this literature using a large microeconomic dataset that covers a relatively long period. We observe that an increase
in political risk significantly affects disinvestment trends in Russia, even when we control for unobservable events and global trends.
We also show that, although MNCs headquartered in sanctioning countries are not necessarily more likely to disinvest, sanctions
increase the disturbing effects of a change in political risk.
3. Dataset
We rely on the Orbis dataset collected between 2000 and 2016. The sixteen-year span of the dataset is a reasonably long period for
observing multinational subsidiaries. The dataset includes information on financial accounts, ownership structure, and date of
incorporation of registered FDI plants in Russia with at least 10 percent foreign ownership. The dataset also identifies the location of
the plant and the home country of the foreign investor. Exit is defined as a subsidiary that is operational in year t − 1, but not in year t,
which indicates a permanent departure, liquidation, or acquisition by another firm. We identify entry, exit, and continuous operations
based on the firm’s ID number: a new ID in the commercial register identifies entry, removal of an ID from the register and a change in
status from active to inactive identifies an exit, and an unchanged ID identifies a continuing subsidiary.
The exact date of exit is defined as the year when an inactive plant, which has changed its legal status (i.e., most commonly by being
dissolved as a legal entity), ceased to report financial data. Financial reporting usually ceases two to three years before the year of legal
dissolution. The time gap between the change in legal status and the cessation of financial reporting reduces the endogeneity risk,
because the decision to exit may add to the political problems in the host location. A similar strategy was used by (Dunne et al., 1988),
although, unlike Dunne et al., we can observe subsidiaries that entered and exited between the starting and ending years of the dataset.
We organize the data into a full sample and several subsamples. The full dataset gives us 48,494 observations of foreign subsidiaries
and includes continuing subsidiaries as well as plants that entered and exited between 2000 and 2016.4 We then split the full sample
into two subsamples. The first subsample is composed of genuine investors, and the second subsample consists of plants established by
Russian investors using tax havens and financial hubs (round-tripping investment). We anticipate plants established by Russian in
vestors to be less sensitive to political problems than plants set up by genuine investors (a list of the home countries of round trippers is
4
This approach causes some right- and left-censoring issues that often arise in survival data. In this study, right censoring refers to firms that
remain in the market after 2016 and are still subject to risk. To deal with right-censoring, we accept our data as survival data, a standard statistical
procedure when applying a Cox proportional hazards model. About 72% of our sample is right censored and 13% is left censored. The latter number
is much lower in the model specifications when covariates exhaust the sample. Our results persist when we run our regressions with the registration
date as the point when a foreign affiliate is subjected to political risk. Thus, left censoring is not much of a problem in our data. Moreover, we have
no interval-censored observations. In all empirical specifications, we apply the Breslow method to deal with the right censoring of firms that did not
exit and continued to operate throughout the observation period.
4
Fig. 1. Exit rate from the Russian market of multinationals by home country. Note: Geographic distribution is calculated as the share of total exits in
the total entries by the FDI source country during the full period, 2000-2016. Round-tripping investments are excluded. For more details on selected
FDI source countries, see Appendix Table A1.
in the Appendix).
As a result, approximately 23,900 subsidiaries are genuine investments, and approximately 24,600 are round trippers. We use the
subsample of round trippers in our baseline specification to determine whether genuine foreign investors and round trippers have
different reactions to political constraints. Between 2000 and 2016, more than 13,000 foreign subsidiaries exited the Russian market,
including 6,556 genuine multinationals. The mean survival period is 8.42 years, and genuine investors survive slightly longer than
round trippers.
Fig. 1 maps the mean exit rate of MNCs over the period 2000-2016. MNCs from the US, the UK, and India have the highest exit rate,
exiting the Russian market over three times more often than they enter. Although the US, the UK, and Germany — the top source
countries — have the highest absolute number of exits, with 628, 616, and 537 disinvestments, respectively, subsidiaries from China,
Kazakhstan, and Kyrgyzstan entered more frequently than they exited.
4. Variables and econometric strategy
4.1. Measuring political risk and political distance
We use a country’s political risk index published by the PRS Group to measure political risk, our main explanatory variable. The
PRS index is widely used in empirical research on the behavior of MNCs (see, e.g., (Kesternich and Schnitzer, 2010; King et al., 2021;
Zhu et al., 2019)). Moreover, PRS offers the only political risk data accepted by the courts in commercial disputes and is often used by
MNCs when they make entry or exit decisions. PRS also has the widest country coverage for the years under review and accounts for
risks generated both inside and outside the host country. The PRS political risk index is based on 100 points. The index includes twelve
weighted variables covering both political and social traits: government stability, socioeconomic conditions, investment profile, in
ternal conflict, external conflict, corruption, military in politics, religious tensions, law and order, ethnic tensions, democratic
accountability, and the quality of the bureaucracy.5 The index reflects the subjective perceptions of experts regarding the political
stability of countries analyzed in PRS’s International Country Risk Guide (Howell, 2014). In the original index, a lower score means
higher risk. However, to facilitate reading and interpretation, we reverse this rule and make a lower score mean lower risk (Egan,
2012).
Following a widely accepted methodology used in FDI literature (see, e.g., (Neumayer and Spess, 2005)), our composite indicator of
political risk is calculated by adding up the scores of each separate risk. We then calculate the change in the composite risk indicator (as
a percentage) from the level of risk in the year of entry and in the year of observation.6 We also calculate the change in the level of
political risk for the twelve separate indicators to fine tune our analysis. In an attempt to show that different types of political risk vary
5
Each component usually has several subcomponents (for a detailed description, see (Howell, 2014)).
6
The change in risk value is calculated using the log difference between the host risk in the year of observation and the year of firm entry. Thus, it
approximates the percentage change in the risk value between the year of firm entry and the year of observation.
5
Fig. 2. Evolution in cumulative political risk in Russia between 1991 and 2016. Note: The y-axis is the composite indicator of political risk
calculated by adding up the scores of each separate risk component.
in their severity and generate different exit effects, one specification of our model treats the components of political risk as stand-alone
variables and includes them individually in the regression. To measure political distance, we determine the political risk gap between
the host and home countries at the time of entry and observe changes in this distance over the period of our analysis.
In our dataset, the change in cumulative political risk in the host country has a mean value of 0.069 and is between -0.415 and
0.335 over the entire period. Higher scores indicate higher political risk in Russia in the year of observation compared to the year of
multinational entry (for definitions and descriptive statistics, see Appendix Table A2). For example, in our analysis, the average value
of the main predictor more or less corresponds to a firm that entered the Russian market in 1997, when Russia’s risk score is 33.58, and
in 2010, when Russia’s risk score is 36.125. The increase in the risk score between 1997 and 2010 is about 7.3 percent and is close to
the sample mean.
Fig. 2 shows the evolution and notable variation in cumulative political risk in Russia over the period 1991-2016. The score peaks in
1999, one year after Russia defaulted on its financial obligations, and significantly declines between 2000 and 2004. MNCs that
entered the Russian market after 2005 have experienced a continuous increase in the risk score.
Still focusing on changes between the entry year and year of observation, we further consider changes in political distance,
measured as the gap in political risk between the host and home countries in absolute value. Fig. 3 plots the evolution of this indicator
over time in selected home countries. These graphs reveal that, in the 2000s, the gap in political distance for MNCs originating in the
US, the UK, Germany, and Japan increased sharply. For instance, the largest gap between the US and Russian scores is observed in
1999, when Russian political risk was the highest in our data, and the gap was 38.25. After having hit rock bottom, the gap between the
Russian and the US scores gradually decreases until shortly before the outbreak of the financial crisis and was at its lowest, 11.4, in
2007. Beginning in 2007, the distance indicator continuously increases. Thus, US MNCs that entered the Russian market after 2007
experienced an increase in political distance to Russia between the year of entry and the subsequent years of observation.7
The trends for countries that have levels of political risk similar to Russia’s (e.g., China, Kazakhstan, Turkey, and Belarus) are less
apparent and country specific. For example, the gap in political distance between the entry and observation years is erratic for MNCs
originating in Turkey, but they have a high exit rate (30 percent in 2016). This observation weakens our argument that increases in the
gap increase investor concern about political risk.
4.2. Factors that affect the impact of political risk on exit decisions
Sanctions imposed on Russia in 2014 and bilateral investment treaties between Russia and other countries are factors that may
exacerbate the effect of political risk on exits. We assume that sanctions alter the relationship between the sanctioning country and the
country being sanctioned and that sanctions affect divestment decisions (Biglaiser and DeRouen, 2007; Vadlamannati et al., 2018).
7
To calculate the change in political distance in the regression, we use absolute distance values. For instance, the absolute distance value between
the US and Russia was 14.5, 24.1, and 27.8 in 2008, 2012, and 2016, respectively. So, for a US MNC that entered the Russian market in 2007, when
the distance was at the lowest level, 11.4, the distance increased by 0.24 (or approximately by 24%) in 2008, 0.75 in 2012, and over 0.89 in 2016.
6
Fig. 3. Evolution in the political distance gap for selected home countries. Note: The zero line is the Russian cumulative political score, and the y-
axis shows its absolute distance from zero in a respective country. Thus, scores closer to zero line indicate that in a given country in a given year, the
risk level is comparable to Russia’s level. A higher absolute level indicates a larger institutional difference between Russia and the country under
consideration.
Although descriptive statistics are inconclusive in this respect, we expect that subsidiaries from sanctioning countries experience the
effects of the sanctioned country’s political risks more profoundly. For example, US subsidiaries have topped the list of exiting firms
since 2008 (six years before US sanctions against Russia), accounting for 8-13 percent of departures by genuine investors in various
years. UK subsidiaries account for 9-11 percent of departures in the same period. In contrast, subsidiaries from non-sanctioning
countries can profit from sanctions if their subsidiaries act as sanction busters (Barry and Kleinberg, 2015), reducing the effects of
7
political risk on these subsidiaries.

To ascertain whether the structure and organization of a subsidiary affects the impact of political risk, we analyze joint ventures
between MNCs and local firms, joint ventures with exclusively foreign MNCs, and wholly owned greenfield projects separately. A local
partner can use existing relationships in the market to mitigate political risk for the foreign partner (Johns and Wellhausen, 2016).
Theoretically, having a joint venture with a local partner reduces the effects of political risk and is negatively associated with exits,
whereas the effects of political risk on greenfield firms can be positive or negative (Nocke and Yeaple, 2007). We also consider a
subsidiary’s size and expect larger subsidiaries to be more embedded in the host country’s economy and exit to have higher costs.
Although it may be true that large MNCs have greater bargaining power, they may also be targeted for government harassment more
than less important, smaller firms (Kobrin, 1987). Appendix Figures A1 and A2 show a sample distribution according to subsidiary size
and mode of entry for genuine investors and the full sample.
4.3. Control variables and fixed effects
To control for MNC exit trends that indicate the important role played by plant-specific, sector-specific, and global shocks, we use
controls frequently applied in the FDI literature. Surviving plants tend to be bigger, older, and more productive than exiting sub
sidiaries, so we control for size and age. Although productivity is strongly correlated with size, we cannot directly measure factor
productivity, so we rely on the findings of Helpman et al., 2004 and Yeaple, 2009, which establish the effect of productivity on
multinational entry and exit behavior. We also account for profit and loss to exclude the possibility that loss is the cause of a MNC’s
divestment.
External insecurity might arise from changes in demand (Cuypers and Martin, 2010) or low growth opportunities (King et al.,
2021). We control for these external conditions using four-digit industrial dynamics to measure the entry rate across industrial sectors.
This approach considers entries and exits during the same period in each sector and reflects industrial shocks better than sales data. We
calculate the entry rate using the total population of Russian firms in Orbis. We expect the hazard of exit to be reduced by higher entry
rates. Additionally, we control for the remaining industry-related heterogeneity by including NACE Rev. 2 dummies.
Global factors might change the effect of the host country’s political risk (Forbes and Warnock, 2012). The impact of political risk
might be weaker if worldwide FDI is large (Méon and Sekkat, 2012). To rule out the impact of global risk, we include the home
country’s share of world FDI as a control in all the equations and expect larger amounts of FDI to make exits less likely. We also
consider characteristics of the host country’s subnational markets: market size is proxied by the log of population, and proximity is
measured by the Euclidian distance between the capital of the host country’s subnational region and the capital of the home country.
Finally, we include year-fixed effects to control for the unobserved heterogeneity of factors and separate the effects of political risk
from other developments in Russia and the home countries between 2000 and 2016 that might affect exit decisions.
4.4. Empirical setup
In this paper, we run an empirical exit model that allows us to test how political risk in host and home countries, plant charac
teristics, and industry and subnational market and proximity characteristics affect the decision by an MNC to divest. We assume that
the post-entry attitude of MNCs is risk averse and profit maximizing. Although entry and post-entry attitudes toward political risk are
not necessarily equivalent, an MNC with a subsidiary already in place must balance the risk of politically induced losses against losses
arising from a divestment decision. We assume that MNCs accept a certain level of political risk when entering the Russian market, as
well as the risk of post-entry costs that the host government might impose on foreign subsidiaries (Moon and Lado, 2000; Teece, 1986;
Vernon, 1971).
Our empirical analysis uses Cox proportional hazard regressions, which are commonly used in event history analysis and relate the
survival time of the foreign subsidiary to changes in political risk in the host or home country. The model produces estimates of the
hazard rate, that is, the immediate moment of failure after a subsidiary exits the market on the condition that it survived in the previous
period. In order to obtain the hazard rate of a subsidiary i at time t, hi (t), the nonparametric baseline hazard function h0 (t) is multiplied
by the parametric part of the equation that captures the impact of the vector of covariates X(t) with parameter estimates βx .
hi (t) = h0 (t)exp(β0 + Xβx ) (1)
The vector of multiple predictors X comprises covariates related to changes in the level of home and host political risk, as well as
other covariates referring to several levels of analysis: firm, region, and country. Year and sector dummies are also included to control
for unobserved risks not directly related to political risk. In all specifications, we employ the Breslow method to deal with the right
censoring of firms that did not exit and continued operating throughout the observation period.
We analyze the data over a reasonably long period, from 2000 to 2016, which lets us combine differences at the microlevel with the
cross-home-country, cross-sector, and cross-regional specificity. In the baseline specifications, we split the sample into investment in
various sectors to test whether political constraints are more important for FDI in services (Kolstad and Villanger, 2008) or in mining
and manufacturing. We expect the impact of political risk on MNCs’ behavior to be unstable over time (Méon and Sekkat, 2012) and
run our regressions using two time subsamples (2008-2011 and 2012-2016). We also assume MNCs to have been more sensitive to
home political risk in the first period because of the world financial crisis, and Russian political risk likely to have been the chief factor
in the second period.
8
K. Gonchar and M. Greve
Table 1
Exits of multinationals by sector, time period, and profitability for the full sample, and genuine and round-tripping investors, 2000-2016.
Exits, no. of obs. Entries, no. of obs. Exit rate, % Exits as % of entries Total no. of firms.
Full Genuine Round- Full Genuine Round- Full Genuine Round- Full Genuine Round- Full Genuine Round-
sample investors tripping sample investors tripping sample investors tripping sample investors tripping sample investors tripping
investors investors investors investors investors
Industry
Mining and 160 57 103 126 40 86 21.8 21.8 21.9 127 142.5 119.8 733 262 471
quarrying
Manufacturing 1,488 968 520 470 327 143 26.9 26.1 28.4 316.6 296 363.6 5,541 3,710 1,831
Construction 1,028 455 573 292 140 152 51.4 47.4 55 352.1 325 377 2,001 960 1,041
Services 10,290 4,699 5,591 3,243 1,665 1,578 29.6 28.8 30.3 317.3 282.2 354.3 34,795 16,313 18,482
9
Other 386 167 219 161 96 65 39 33.9 44 239.8 174 336.9 991 493 498
Sample periods
2000-2007 15 7 8 877 546 331 0.5 0.4 0.7 1.7 1.3 2.4 2,815 1,678 1,137
2008-2011 3,642 1,788 1,854 1,864 891 973 12.2 12 12.5 195.4 200.7 190.5 29,807 14,941 14,866
2012-2016 10,103 4,647 5,456 5,423 2,698 2,725 63.7 64 63.4 186.3 172.2 200.2 15,868 7,264 8,604
Profitability
Profitable 11,083 5,443 5,640 6,052 3,052 3,000 30.9 29.7 32.3 183.1 178.3 188 35,816 18,336 17,480
Loss making 2,677 999 1,678 2,112 1,083 1,029 21.1 18 23.5 126.8 92.2 163.1 12,674 5,547 7,127
Note: Services include wholesale and retail trade, repair of motor vehicles and motorcycles; transportations and storage; accommodation and food service activities; information and communication
services; financial and insurance activities; real estate activities; professional, scientific and technical activities; administrative and support service activities; public administration and defense,
compulsory social security; education; human health and social work activities; arts, entertainment and recreation; other service activities. The subsector “Other” includes all remaining sectors: agri
culture, forestry and fishing, electricity, gas, steam, and air conditioning as well as water, sewerage, waste management, and remediation activities.

Fig. 4. Kaplan-Meier survival estimate across the type of investors, sectors, and sample periods. Notes: In the first graph, both genuine and round-
tripping investors are included. In the sector and time sample graphs, we include only the subsample of genuine investors. The x-axis shows the
number of years, the y-axis displays the Kaplan-Meier survival estimates. Failure is defined as the exit of the subsidiary from the Russian market.
5. Empirical results
5.1. Effect of political risks on exits
The question we address first is whether MNCs are vulnerable to changes in political risk in the host and home countries and
whether this is consistent over time and across the types of MNCs and various sectors. To do this, we test whether the effects of risk on
exits are influenced by sector-specific investment irreversibility and product complexity (Kim and Kung, 2017; Sottilotta, 2016) and
whether MNCs’ tolerable levels of risk change over time. We expect an increase in political risk compared to the year of entry to drive
MNCs to disinvest and the impact of political risk to be greater for genuine investors than round trippers and for mining and quarrying
10
K. Gonchar and M. Greve
Table 2
Political risk as a determinant of MNC exit decisions, baseline results.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
All subsidiaries Round Genuine Genuine Genuine Genuine Genuine Genuine Genuine Genuine
trippers investors investors investors investors investors investors investors investors
Variables all years all years all years 2008-2011 2012-2016 Mining and Manufacturing Construction Services Other sectors
quarrying
Change in host-country 2.73*** 5.93*** 2.40*** 1.72* 2.79*** 1,803.09*** 1.93* 7.76*** 2.13*** 37.33***
political risk
(0.359) (3.615) (0.327) (0.535) (0.449) (4,286.501) (0.661) (4.526) (0.333) (32.333)
Change in home-country 0.67*** 0.29*** 0.83*** 1.01 0.83*** 0.37 0.78* 0.71 0.88* 0.39**
political risk
(0.038) (0.131) (0.048) (0.114) (0.052) (0.282) (0.115) (0.159) (0.058) (0.160)
Percentage of total world 0.99*** 0.66*** 0.99*** 1.00 0.99*** 1.01 0.99* 1.00 0.99*** 0.96***
FDI
(0.002) (0.077) (0.002) (0.006) (0.003) (0.021) (0.007) (0.011) (0.003) (0.015)
Log of regional 1.11*** 0.96 1.10*** 0.98 1.10*** 1.04 1.08** 1.16** 1.12*** 0.96
population
(0.015) (0.052) (0.016) (0.030) (0.018) (0.156) (0.037) (0.067) (0.020) (0.067)
Euclidian distance 1.00 1.00*** 1.00** 1.00* 1.00*** 1.00 1.00 1.00 1.00* 1.00
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Age of the plant 1.02*** 1.04*** 1.02*** 1.01 1.02*** 1.18*** 1.03*** 1.04** 1.01* 1.09***
11
(0.004) (0.014) (0.004) (0.010) (0.005) (0.071) (0.010) (0.016) (0.004) (0.025)
Loss making 3.30*** 7.36*** 3.23*** 25.15*** 2.10*** 4.54*** 4.83*** 2.89*** 2.88*** 7.08***
(0.138) (1.095) (0.138) (1.947) (0.099) (2.033) (0.489) (0.535) (0.148) (1.446)
Sectoral entry share 0.05*** 0.07 0.08*** 0.40 0.07*** 0.00 0.21 0.00* 0.04*** 1.07
(0.021) (0.122) (0.038) (0.348) (0.036) (0.010) (0.335) (0.000) (0.024) (4.399)
Greenfield 0.34*** 0.43*** 0.33*** 1.97*** 0.09*** 0.23*** 0.27*** 1.25 0.33*** 0.50**
(0.013) (0.069) (0.016) (0.137) (0.008) (0.116) (0.035) (0.290) (0.018) (0.153)
JV with local partner 0.69*** 0.44** 0.69*** 1.36*** 0.57*** 0.56* 0.69*** 0.89 0.69*** 0.65**
(0.021) (0.148) (0.022) (0.089) (0.021) (0.183) (0.051) (0.109) (0.026) (0.115)
Medium size 1.30*** 1.49*** 1.27*** 1.12 1.26*** 4.59*** 1.53*** 0.82 1.18** 2.06*
(0.070) (0.196) (0.074) (0.117) (0.086) (2.496) (0.184) (0.201) (0.084) (0.812)
Small 3.26*** 2.41*** 3.34*** 2.51*** 3.10*** 5.12*** 3.92*** 2.18*** 3.17*** 4.53***
(0.156) (0.303) (0.173) (0.228) (0.188) (2.647) (0.414) (0.450) (0.203) (1.699)
No. of obs. 107,805 18,717 89,088 36,887 50,012 1,214 16,199 4,484 64,732 2,459
No. of firms 25,214 6,449 19,350 13,841 16,346 237 3,304 794 14,590 425
No. of exits 5,862 509 5,353 1,337 4,016 46 812 389 3,962 144
BIC 103,600.204*** 7,715.893*** 92,375.368*** 21,600.728*** 64,913.456*** 500.573*** 11,095.468*** 4,732.879*** 65,930.095*** 1,597.731***

Log pseudolikelihood -51,533.576*** -3,680.877*** -45,971.134*** -10,626.857*** -32,272.788*** -175.719*** -5,450.807*** -2,282.357*** -32,787.799*** -694.7***
Notes: All estimations use the Cox proportional hazard model. Regression coefficients are the hazard ratio (exponential coefficients). Z statistics are reported in parentheses. Robust standard errors are
used. ***, **, and * denote statistical significance at 1% 5%, and 10% (the reference value is 1, meaning “no effect”). The Wald test checks the null hypothesis that all (non-exponential) coefficients are
zero. The reference category for the size dummy is large and very large subsidiaries; the reference category for the type of organization is joint ventures with several foreign owners. Year-fixed effects and
NACE Rev. 2 dummies at the section level are included in all specifications. Other sectors (Column 10) include agriculture, forestry and fishing, electricity, gas, steam, and air conditioning supply as well as
water, sewerage, waste management, and remediation activities.
Fig. 5. Interaction of political risk with the profit and loss. Notes: This is the estimation result from interaction of the change in the host-country
political risk relative to entry with the dummy for loss-making firms on the sample of genuine investors. 95% confidence intervals are marked with
vertical lines. Predicted hazards are estimated separately for each group at hypothetical fixed intervals of change in the Russian political risk score
between -0.41 and 0.34, using the actual observed values for all other variables.
more than manufacturing and services.

The descriptive statistics in Table 1 and the Kaplan-Meier estimator in Fig. 4 show that the construction sector was most severely
affected. More than half the foreign subsidiaries operating in construction exited the market (full sample), and the number of exits was
more than three times that of entries. Almost 30 percent of foreign subsidiaries in the service sector exited, and exits outnumber entries
threefold. The exit rate is slightly lower in manufacturing (27 percent in the full sample), but the sector also experienced very few
entries. More than one-third of subsidiaries grouped in “other subsectors” exited the Russian market, though the statistics for this group
should be viewed with caution due to its high heterogeneity.
Round-tripping investors (Russian investors who use tax havens and financial hubs) and genuine foreign investors report com
parable numbers of ongoing plants, exits, and entries, though they may have different sensitivities to political problems and different
motivations for exits. For example, at the end of 2014, the Russian government passed an anti-offshore law, which led to a decline in
the FDI stock held by countries that are centers of round-tripping FDI, most notably, Cyprus.
Below we present a graphical analysis of our data using the Kaplan-Meier estimator. Fig. 4 shows that genuine investors survive
slightly longer than round trippers, and manufacturing firms are more resilient than service and construction firms but less resilient
than firms operating in mining and quarrying.
Our baseline regression results are presented in Table 2. The hazard ratios (exponential coefficients) are the expected ratios of failed
firms over surviving firms, such that hazards greater than 1 indicate an increasing hazard rate and are associated with a reduction in a
subsidiary’s survival time. Hazard ratios less than 1 imply that a subsidiary postponed exiting or did not consider doing so. Column 1 in
Table 2 includes all observation years and all foreign investors, both genuine and round trippers. Columns 2 and 3 split the full sample
into subsamples of round-tripping and genuine investors to test whether round trippers, who are more familiar with the Russian
political context, are less likely than genuine investors to exit in response to growing political risk in Russia. Columns 4 and 5 show our
results for the time subsamples (2008-2011 and 2012-2016) to determine whether the influence of political risk in the host and home
countries on exit differs between the period of the world financial crisis (2008-2011) and the later period, characterized by growing
political risk in Russia (2012-2016). Finally, Columns 6-9 examine whether the impact of political risk varies across sectors.
Growth in political risk in the host country has strong explanatory power in all specifications of the model: in the full sample, an
increase in host-country political risk of one unit (an increase in cumulative risk of 100 percentage points relative to the entry year or a
risk level twice as large) compared to the entry year makes exit 2.7 times more likely. In almost all specifications, growth in the home
country’s political risk reduces the likelihood of exits. Genuine investors react only to host country risk, which increases hazard 2.4-
fold. Round trippers are not immune to host country political risk, though their exit strategy is driven mostly by the change in Russian
regulations on financial hubs in 2014. This change is not captured by our measurement of host country political risk, therefore
explaining their disinvestment behavior is beyond the scope of this paper. In other analyses, we exclude firms created by round trippers
from the sample and include only subsidiaries founded by genuine investors.
When we split the sample into two periods, we find that, in both periods, an increase in host-country risk increases the hazard ratio,
12
Fig. 6. The effects of change in host- (left graph) and home-country (right graph) political risk components on exits (genuine investors only). Notes:
The figure plots coefficients from the Cox proportional hazard model, with all controls and fixed effects included. All individual political risks are
included separately to avoid a multicollinearity problem. Regression coefficients are marked as dots and stand for the hazard ratios (exponential
coefficients). The confidence intervals are depicted as horizontal spikes. If they cross the red line (equal to 1), the covariate is not significant.
Coefficient estimates to the right of this line show risk components that make the exit more likely, coefficients to the left of this line are for risk
components that are associated with fewer exits. The x-axes are scaled differently for the changes in host- and home-country risk components. The
total number of observations is 89,631 and 91,835 in all regressions for the left and right plots, respectively. The number of firms is 19,461 and
20,081, respectively, and the number of failures is 5,394 for the host-country risk components regressions and 5,376 for the home-country risk
component regressions.
though the coefficient for the period after 2012 is higher and more significant. The findings also reveal that none of the sectors were
immune to political risk. Mining and quarrying as well as construction are more sensitive to risk than manufacturing or services. This
finding partly confirms the result by Iwasaki and Kim (2020) that foreign-owned companies operating in Russia’s primary industries
have a higher risk to their survival than firms in other sectors. The relatively small number of foreign subsidiaries in our sample that
operate in mining and quarrying could be the reason for the higher coefficient of this group’s political risk. There is not enough ev
idence to claim higher vulnerability of more mobile sectors (Kolstad and Villanger, 2008).
Table 2 also presents some interesting results for the controls. In almost all specifications, increased global FDI activity reduces the
hazard of exiting. This finding indirectly confirms the conclusion of Méon and Sekkart (2012) that more global FDI activity conditions
the effect of risk on MNC behavior. Industry growth, proxied by the entry rate in the corresponding market in Russia, improves a
subsidiary’s chances of survival, showing that dynamic sectors provide significant advantages.
Both plant size and loss making are correlated with exit decisions in the expected way: smaller and loss-making plants are more
likely to exit. Small and medium-size firms dominate the sample (see Appendix Figure A1) and are usually more likely to exit,
especially during economic downturns. So, our finding is not surprising and is in line with the liability of smallness established in the
literature (Cefis et al., 2021).
Incurring losses has a significant effect on exit decisions in the years immediately after the financial crisis. Subsidiaries that re
ported losses in that period were more than twenty-five times more likely to exit than profitable firms, and plants incurring losses were
only about twice as likely to exit in 2012-2016.
Do losses and political risks interact, and do subsidiaries that face losses exit in the face of increased risk relative to entry? The
answer is no, if political risk relative to entry increases, unprofitable subsidiaries are inclined to exit less, as shown in Fig. 5. This result
illustrates the increasing inefficiency of the firm selection mechanism in the Russian market, when the institutional environment
deteriorates — a phenomenon referred to as “weakening competitive pressure.” For example, Bogetić and Olusi, 2013 explain the lack
of a link between total factor productivity (TFP) and survival in the Russian manufacturing industry due to low competition.
Our finding that older plants are also more likely to exit suggests that firms with long survival in the market are more susceptible to
closure if institutional quality decreases over time. Greenfields and joint ventures with local partners have much less exit hazard than
joint ventures with only foreign investors, which are our benchmarks in the analysis. This is an interesting result, given that, among
genuine investors, greenfields dominate as a mode of entry: 50 percent of the subsidiaries in the full observation period entered as
wholly owned firms, followed by JVs that consist only of foreign firms (28 percent) and by JVs with local partners (22 percent).
However, JVs with other foreign firms dominate an organizational mode among exits (63 percent). Our results confirm not only that
wholly owned subsidiaries dominate entries but that taking this form significantly increase the survivability of foreign firms in the
Russian market. In Section 5.5, we look in more detail at the interaction of the mode of entry and the change in political risk to
determine whether greenfields survive longer than JVs because they manage political risks better.
13
Geographic proximity, which the literature finds to have a strong impact on entry decisions, does not seem to have a significant
impact on exits.
5.2. The effect of individual risk components on exits
To determine the effect of individual risk components on exits, we replace the main predictor of interest — change in cumulative
risk score — with change in the level of individual risk components and use the same equation for each of the twelve risk indicators.
The previous literature suggests that in countries with high cumulative risk scores, government instability contributes the most
significantly to exits (Yasuda & Kotabe, 2021). In their study of European MNCs’ reactions to various disasters, Oh and Oetzel, 2011
show that these firms disinvest in response to terrorist attacks and technological disasters. Their definition of terrorist attacks is close to
that of internal conflict, described by PRS as a measure of political violence, including terrorism/political violence and civil disorder.
Russia’s score for this risk indicator remains relatively stable during the years of observation in our study.
The results from estimating the impact of the change in individual political risks in host and home countries are presented as
coefficient plots in Fig. 6. They confirm the expectation that government instability in Russia contributes to exits only slightly.8 An
increase in government instability of ten percentage points compared to that of the entry year increases the probability of exit by 1.8
percent. An increase in government instability in an MNC’s home country has a negative and significant effect on exit from the Russian
market. In fact, MNCs in Russia tend to shy away from disinvestment if their home country is experiencing internal or external conflict
as well as religious or ethnic tension. The only home-country political risk indicator that contributes to exits is an increasing military
presence in politics. Examples of home countries with a growing military presence in politics that have investment in Russia are Egypt
and Belarus.
Law and order, the investment profile, and socioeconomic conditions are the political risk indicators whose changes have the
highest impact on MNCs’ decisions to disinvest in Russia. The first two reflect Russia’s poor protection of property rights, including the
strength and impartiality of the legal system and contract viability. This finding confirms the results of a survey of foreign-owned firms
in Russia, in which 77 percent of the respondents consider Russia’s unstable and inconsistent regulatory framework the most serious
threat to multinationals, and 33 percent of the respondents believe the most serious threat is selective enforcement (Ernst & Young,
2015).
Socioeconomic risks, which deal with consumer confidence, unemployment, and poverty, are second to the insecurity of property
rights (investment profile) as a motivation to exit. We find that, contrary to the previous literature, political violence (internal conflict)
has little effect on exits.
MNCs seem to be immune to an increase in corruption in the Russian political system. A possible explanation for this immunity
might be the relative tolerance of MNCs to corruption at the point of entry, when expectations about the return on investment were
higher than the cost of corruption, and relatively stable corruption risk scores. This finding is consistent with Barbopoulos et al.,
(2014), who, as mentioned earlier, report the highest shareholder wealth effects for UK foreign investment in emerging countries with
high political risk and high corruption ratings.
5.3. Does political distance affect an MNC’s exit decision?
Next, we turn to the impact of institutional similarity with respect to political risk between source and destination countries and
analyze the effect of political distance on an MNC’s exit decision. This is because we cannot deny that some exit decisions by MNCs in
Russia are determined not only by political risks in Russia but also by conditions at home. We have two expectations with respect to the
outcome. First, an MNC that originates in a country with high political risk scores (South) might be better equipped to deal with the
challenges of operating in a host country with a similarly challenging institutional environment. In other words, the MNC might feel
more at home in the Russian market and feel less pressure to exit (Aleksynska and Havrylchyk, 2013; Satyanand, 2011). Second, MNCs
from countries with a stronger institutional environment (North) may be better able to absorb the costs associated with political risks
and have a better chance of survival (Dixit, 2011). We also consider bilateral investment treaties that might affect exits. An investment
treaty could protect a subsidiary by increasing its bargaining power, especially an MNC that originates in a country with poor insti
tutional quality (Neumayer and Spess, 2005).
The Kaplan-Meier estimator (Fig. 7) suggest that, in general, MNCs from countries with lower political risk scores than Russia have
a slightly higher survival rate, and investment treaties also seem to offer MNCs some protection.
Using the same baseline specification as in Eq. (1), we first estimate the effect of the absolute political distance and the change in
distance between the entry and observation years, as a whole. The results are shown in Table 3 and include all control variables, such as
industry- and year-fixed effects. Neither indicator of political distance changes firm survivability (Columns 1 and 2 in Table 3).
This result might be driven by the heterogeneity of home countries’ institutional conditions and various trends in political distance
over time. To address this possibility, we decompose the effect of distance on exits and rerun the regressions on two subsamples: MNCs
originating in countries with lower risk scores than Russia and MNCs originating in countries with risk scores that are higher than or
the same as Russia’s. We employ three indicators of political risk in each subsample: change in political distance, change in host-
8
Although it might appear that, in the Russian political context, government instability is not an issue during the years of observation, a closer
look at the PRS manual’s subcomponents of government instability reveals that the subcomponents are government unity, legislative strength, and
popular support, with the last of them relatively volatile.
14
Fig. 7. Kaplan-Meier survival estimator across groups of subsidiaries by the political similarity of the home country with Russia (left graph) and the
existence of an investment treaty (right graph), genuine investors only.
Table 3
Summary results on the impact of institutional similarity on MNCs’ exit decision (genuine investors only).
(1) (2) (3) (4) (5) (6)
All genuine investors Countries with lower risk Countries with higher risk
Absolute political distance 1.00

(0.001)
Change in political distance 1.00 1.03 0.92***
(0.015) (0.019) (0.025)
Change in host-country political risk 2.43*** 2.43*
(0.351) (1.166)
Change in home-country political risk 0.93 0.41**
(0.055) (0.164)
Investment treaty 0.81*** 0.80*** 0.79*** 0.80*** 1.12 1.16
(0.024) (0.024) (0.026) (0.027) (0.106) (0.112)
No. of obs. 90,253 89,088 80,366 80,366 8,722 8,722
No. firms 19577 19350 18387 18387 3181 3181
No. of exits 5418 5353 4759 4759 594 594
BIC 93632.277*** 92375.727*** 81098.650*** 80987.809*** 7796.330*** 7808.829***
Log pseudo-likelihood -46599.342*** -45971.313*** -40289.555*** -40273.665*** -3743.914*** -3745.627***
Wald chi2(10) 235275.345*** 230503.796*** 732830.311*** 107766.033*** 31524.628*** 30344.445***
Notes: All estimations use the Cox proportional hazard model. Regression coefficients are the hazard ratio (exponential coefficients). Z statistics are
reported in parentheses. Standard errors are adjusted for clustering at the subsidiary level. ***, **, and * denote statistical significance at 1%, 5%, and
10%. The reference category for investment treaty is countries that do not have an investment treaty with Russia. The Wald test checks the null
hypothesis that all coefficients are zero. All controls are included as in Table 2.
country political risk, and change in home-country political risk (Columns 3-6). The findings imply that the effect of institutional
similarity is more nuanced than we hypothesized.
The results show that we cannot claim that institutional similarity helps MNCs remain in the Russian market. An increase in
institutional distance between the home and host countries is significant only for countries with high risk scores (Column 5), whereas
low-risk countries remain immune to a change in distance (Column 3). Interestingly, high-risk countries seem to avoid disinvestment
when distance grows.
This effect might stem from the growth of political risk in either Russia or the home country. However, in Columns 4 and 6 in
Table 3, the effect of a change in Russian risk remains positive and significant for both groups of MNCs. At the same time, a change in
home-country political risk is not significant for MNCs from countries with political risk scores that are lower than Russia’s (Column 4),
and having higher home-country risk reduces the hazard of disinvestment for MNCs from countries with political risk scores higher
than Russia’s (Column 6). Our intuition is that a worsening political situation in the home country increases the tolerance to Russian
risk of southern MNCs, explaining why growth in political distance reduces the likelihood of exits by this group of countries. This is
consistent with the point made by Dixit, 2011 that MNCs originating in countries with poor institutional environments find FDI in
countries with better governance more attractive.
An investment treaty offers protection for subsidiaries and reduces the hazard of exit under pressure from political risk. The
findings show that subsidiaries from countries that have an investment treaty with Russia are less likely to exit in response to increasing
political distance, though this likelihood applies mostly to low-risk countries.
15
Fig. 8. Kaplan-Meier survival curve for MNCs representing sanctioning and non-sanctioning home countries.
Table 4
The impact of sanctions on exit decisions (genuine investors only).
Change in political risk Change in political distance
Change in host-country political risk 1.97*** 1.40**

(0.270) (0.228)
Sanctions 0.86** 0.73*** 0.88** 0.83***
(0.056) (0.057) (0.058) (0.056)
Interaction of change in host-country political risk and sanctions 2.37***
(0.522)
Change in home-country political risk 0.89* 0.89*
(0.057) (0.057)
Change in political distance 0.96** 0.94***
(0.017) (0.018)
Interaction of change in political distance and sanctions 1.25***
(0.068)
No. of obs. 89,088 89,088 89,088 89,088
No. firms 19,350 19,350 19,350 19,350
No. of exists 5,353 5,353 5,353 5,353
BIC 92,881.273*** 92,969.275*** 92,888.612*** 92,886.286***
Log pseudolikelihood -45,819.479*** -45,812.192*** -45,828.847*** -45,821.986***
Notes: All estimations use the Cox proportional hazard model. Regression coefficients are the hazard ratio (exponential coefficients). Z statistics are
reported in parentheses. Standard errors are adjusted for clustering at the subsidiary level. ***, **, and * denote statistical significance at 1%, 5%, and
10%. The Wald test checks the null hypothesis that all coefficients are zero. All controls are included as in Table 2. Additionally, country-fixed effects
are included.
5.4. The importance of sanctions
Next, we focus on whether MNCs are sensitive to their home country’s imposition of sanctions against Russia and whether this
increases the effect of risk on exits.9 We expect sanctions to exacerbate the effect of risks on MNCs’ behavior, in both home and host
countries.
The Kaplan-Meier estimator plots survival curves for two conditions: subsidiaries from countries that imposed sanctions on Russia
after 2014 and subsidiaries from countries that did not (Fig. 8). Fig. 8 shows a difference in the failure rate between the two groups.
Subsidiaries from the sanctioning states were less likely to exit at the beginning of the observation period but more likely to exit after
2012, two years before the sanctions were imposed.
We use the same proportional Cox-Hazard model as specified in Eq. (1) and additionally interact a sanctions’ dummy with the
indicators for political risk and political distance. In addition to the usual controls, we include country fixed effects to capture het
erogeneity between (non-)sanctioning states. Table 4 presents the results on the effect of sanctions on the hazard of exit and interacting
the change in Russian political risk and political distance (our main predictors of interest) with the dummy for sanctioning states.
9
Sanctions on Russia were first imposed by the EU-27, the US, Canada, and Australia in early 2014, after the annexation of Crimea and armed
conflict in Ukraine. Sanctions were extended in later years, including travel bans, asset freezes on individuals, financial sanctions on Russian banks
and companies, an arms embargo, trade restrictions in technology and services, particularly in the oil and gas sector. Our data does not allow to
account for sanctions imposed in 2022 after recognition of two self-proclaimed republics in Ukraine and further military actions by Russia.
16
Fig. 9. Kaplan-Meier survival curve for size groups of subsidiaries and their organizational form.
Fig. 10. Interaction of political risks with the size and organization mode. Notes: 95% confidence intervals are marked with vertical lines. Predicted
hazards are estimated separately for each group at hypothetical fixed intervals of change in the Russian political risk score between -0.41 and 0.34,
using the actual observed values for all other variables.
MNCs from sanctioning countries are 14-28 percent more likely to avoid the risk of exit than the rest of the sample, and the variable for
sanctions is statistically different from 1 in all specifications in Table 4.
The interaction terms between our political risk measurement and sanctions are reported in Column 2 of Table 4. The interaction
term is positive and significant at 1 percent, suggesting that the positive effect of risk on exit decisions is greater when the home
country imposes sanctions against Russia. As for the alternative measure of political risk, calculated as the change in political distance
between the home and host countries and examine whether the effect of political distance is conditional on sanctions (Table 4, Column
4), the interaction term is positive, higher than 1, and significant at 1 percent. This suggests that the tendency for greater political
distance to increase exit probability becomes more pronounced when the home country is a sanctioning country.
5.5. Structural factors that might reduce the impact of political risk on exits
Based on discussions in the literature on industrial organization, in a high-risk political environment, we expect the size of a
subsidiary to affect the likelihood of exiting. Our descriptive graphical analysis (Fig. 9) shows that large subsidiaries have higher
survivability. Firms organized as JVs with a Russian partner also have a much higher survival rate than JVs without a local partner,
whereas greenfields seem to be the most resistant to exit.
The size of the subsidiary has the anticipated effect in all earlier specifications, a large subsidiary is 1.3 times less likely to exit, and
the hazard rate is 3.3 times higher for small subsidiaries than for large ones (Table 2, Column 3). Sensitivity to scale is mostly typical in
17
mining and manufacturing, where small MNC subsidiaries exit over five times more often than large subsidiaries (Table 2, Columns 6-
7)
Because larger subsidiaries, greenfields, and JVs with local partners might face a smaller increase in the host country’s political
risks or institutional difference, we explore how scale and the organizational mode influence the effect of risk on exits. Our approach is
to interact the host-country political risk indicator with the size group dummies and dummies for organization.
We present the result of our regression analysis in Fig. 10.10 The marginal plots in the figure show the predicted hazard ratios and
allow much more intuitive interpretation of the regression results when they include interaction terms. They allow us to observe
changes in the differences across various groups when any other variable of interest increases. Thus, Fig. 10 demonstrates the adjusted
prediction of the exit ratio at various intervals of the change in host-country political risk for the size groups of subsidiaries and various
organization modes.
Fig. 10 shows that small firms are significantly sensitive to an increase in political risk scores in Russia. This finding is consistent
with Dial and Murphy, 1995, who find that the large sunk costs associated with larger ventures discourage exits. Greenfield sub
sidiaries seem to resist the growth of risk in Russia more successfully than JVs with or without local partners, and they manage political
risks better. In the economics literature two explanations are offered for this result: Greenfield investment is systemically more efficient
than cross-border acquisition (Nocke and Yeaple, 2008), and ownership of assets is a source of power when contracts are incomplete
(Grossman and Hart, 1986).
6. Conclusions
This paper presents an empirical analysis of how MNCs’ exit decisions are influenced by changes in Russia’s political risk scores and
changes in their home countries’ political environment. We compare the effects of political risk on exiting in two periods, with in
dustry- and investor-specific analysis, and observe that the effects are statistically significant in all the years of observation. Our
findings strongly support what has already been suggested in the literature on industrial organization and institutions by showing that
a change in political risk between the entry and observation year influences decisions by MNCs to quit the Russian market. We interact
these risks with firm size and organizational structure and take a closer look at several relational aspects between the home and host
countries to deepen our understanding of the behavior of MNCs.
Our results confirm that an MNC faces a trade-off between the economic benefits of remaining in a difficult political environment
and the costs associated with making an exit decision. Our findings suggest that MNCs with large subsidiaries, JVs with local partners,
and greenfields have the greatest resilience to changes in political risk and the institutional environment. We find that differences and
changes in the institutional gap between the home and host countries between the entry and observation points influence MNCs’
response to political risks only for subsidiaries from high-risk countries. They are less likely to exit in response to the growth of home-
country political risk when the Russian institutional environment becomes relatively more attractive.
Our paper also contributes to the sanctions debate. Alignment with the group of countries that imposed sanctions makes sub
sidiaries less likely to exit, but sanctions that penalize Russia strengthen the effects of both the growth in host-country risk and the
growth in political distance.
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to
influence the work reported in this paper.
Acknowledgements
The authors thank the anonymous reviewers, who generously shared their ideas and made this publication possible. They are
particularly grateful for the valuable suggestion on how to improve our measurement of institutional risks — the issue most open to
debate in this strand of literature. Special thanks are due to our colleague, Dr. Philipp Marek, who provided encouraging support and
motivating guidance at the initial stage of the research. The work also benefited from helpful suggestions and comments by Kseniia
Gatskova, Joanna Tyrowicz, and other participants in the seventh annual conference of the Leibniz Institute for East and Southeast
European Studies, Regensburg, in 2019. The authors thank the Basic Research Program of HSE University for financial support
Appendix
See appendix Table A1,Table A2,Fig. A1,Fig. A2
10
The regression results with interaction of size dummies and host-country political risks are available upon request from the authors.
18
Table A1
Exit, entry, and exit rate for selected home countries, 2000-2016.
MNC home country No. of firms that exited No. of entries No. of firms No. of observations Exit rate
Cyprus 3,931 1,779 14,018 65,088 2.21

Virgin Islands 1,629 524 4,841 22,662 3.11
Seychelles 883 1,338 2,892 10,299 0.66
United States 631 195 1,807 9,087 3.24
United Kingdom 610 506 2,421 11,041 1.21
Germany 535 356 2,557 13,038 1.50
Netherlands 344 261 1,605 8,032 1.32
Belarus 339 198 1232 5,215 1.71
Ukraine 331 153 843 3,772 2.16
Switzerland 266 137 1,114 5,158 1.94
Finland 252 83 949 4,846 3.04
China 236 311 908 5,857 0.76
Turkey 232 80 560 2,595 2.90
Panama 224 51 531 2,520 4.39
Belize 215 112 809 2,936 1.92
Austria 190 105 784 3,998 1.81
Bulgaria 186 78 497 1,530 2.38
Uzbekistan 141 122 349 1,603 1.16
Italy 139 156 695 3,119 0.89
Estonia 134 57 413 1,864 2.35
Sweden 130 61 454 2,389 2.13
Latvia 127 92 477 1,993 1.38
France 125 70 590 2,974 1.79
Luxembourg 106 53 448 2,207 2.00
Liechtenstein 104 14 283 1,456 7.43
Kazakhstan 94 109 334 1,710 0.86
Czech Republic 92 74 376 1,700 1.24
Lithuania 90 59 376 1,608 1.53
Poland 84 58 363 1,743 1.45
Bahamas 78 16 200 1,009 4.88
Denmark 76 29 290 1,448 2.62
Saint Kitts and Nevis 70 14 191 929 5.00
Gibraltar 57 1 160 859 57.00
Spain 53 35 228 1,022 1.51
Moldova 51 22 114 522 2.32
Israel 49 36 192 847 1.36
India 49 15 144 609 3.27
Belgium 40 27 228 1,073 1.48
Azerbaijan 37 32 99 434 1.16
Marshall Islands 36 32 126 501 1.13
Armenia 36 47 137 572 0.77
Norway 36 17 145 701 2.12
Canada 33 14 130 700 2.36
Japan 32 49 198 1,108 0.65
Korea, South 32 76 177 1,106 0.42
Korea 30 24 97 550 1.25
Hungary 28 19 102 515 1.47
Tajikistan 28 29 55 256 0.97
Australia 24 8 55 287 3.00
Kyrgyzstan 23 90 113 373 0.26
Ireland 23 13 114 556 1.77
Hong Kong 22 37 99 460 0.59
Slovakia 22 11 80 341 2.00
Georgia 20 15 57 293 1.33
Dominica 20 16 89 354 1.25
Singapore 19 61 137 567 0.31
Serbia 19 18 66 305 1.06
Slovenia 17 15 85 400 1.13
Vietnam 17 11 61 248 1.55
Anguilla 17 7 64 240 2.43
Kiribati 16 1 51 181 16.00
New Zealand 16 6 51 229 2.67
Greece 15 6 43 203 2.50
Saint Vincent and the Grenadines 14 1 32 171 14.00
Cayman Islands 13 9 63 317 1.44
Malta 10 6 54 301 1.67
Afghanistan 10 4 25 129 2.50
19
Notes: All values are calculated for the full period, 2000-2016. Exit rate is calculated as the share of total exits in total entries by the FDI source
country. The list includes both round-tripping investors (see the full list in the Appendix) and genuine investors. Only countries with more than 10
exits are included in the table.
Table A2
Definition of variables and descriptive statistics, for genuine investors.
Variable name Definition Source Mean Std Min Max
Failure MNC decision to exit - liquidate or sell subsidiary in the host Orbis 0.0560 0.230 0 1
market calculated as a share of exits in the total number of
observations
Change in host-country Change in the country risk measure, incorporating 12 political and PRS Group 0.0687 0.160 -0.415 0.335
political risk social attributes of the business environment in Russia, between data
the year of entry and the year of observation. The variable is
calculated using the log difference between the risk in the year of
observation and the year of firm entry. A higher score (above 0)
indicates an increase in risk compared to the year of entry, and a
lower score indicates a decrease in the risk level.
Change in home-country Change in the country risk measure, incorporating 12 political and PRS Group 0.105 0.255 -1.080 1.541
political risk social attributes of the business environment in the home country. data
The variable is calculated using the log difference between the risk
in the year of observation and the year of firm entry. A higher score
(above 0) indicates an increase in risk compared to the year of
entry, and a lower score indicates a decrease in the risk level.
Political distance Absolute difference in the political risk index between Russia and PRS Group 17.67 9.426 0 37.71
the home country. data
Change in political distance Change in the absolute political difference between the year of PRS Group -0.0615 0.792 -6.771 5.403
entry and the current year of observation. The variable is data
calculated using the log difference in the risk distance between the
year of observation and the year of firm entry.
Countries with political risk Dummy for the difference in the political risk index between Russia PRS Group 0.903 0.296 0 1
assessment worse/better and the home country; it equals 1 when positive (better than data
than Russia Russia) and 0 otherwise (the same or worse than Russia).
Characteristics of the subsidiary
Size Categorical variable for small (3), medium (2), and large (1) Orbis 2.208 0.779 1 3
subsidiaries, based on the Orbis estimation of plant size with a
combination of employment and output with controls for the
sector.
Age Number of years in the market. Orbis 7.679 5.343 0 25
Loss-making Dummy for reported loss, equals 1 if loss in the year prior to exit. Orbis 0.0475 0.213 0 1
Mode of organization Categorical variable for greenfield or wholly owned foreign Orbis 1.853 0.811 1 3
subsidiary by a sole foreign investor with 100% of shares (1), joint
venture with at least one local partner (2), and joint venture with
only foreign partners (3).
Home-country characteristics
Investment treaty Dummy that equals 1 if the home country has concluded an WTO 0.746 0.435 0 1
investment treaty with Russia and 0 otherwise.
Sanctions Dummy that equals 1 if the home country imposed sanctions on TASS, 0.243 0.429 0 1
Russia after 2014 and 0 otherwise. information
agency, tass.
ru
Host-country characteristics
Geographic proximity Distance between the capital of the host country and the home Author 2748 2364 272.8 17036
country. calculations
using GPS
coordinates,
gps-
coordinates.
org
Sector dynamics Share of entries by new firms in the total number of firms in the Author 0.0582 0.0474 0 0.607
sector at the four-digit level. estimation
based on
Orbis total
population
of plants
Market size Log of population in the subnational region. Rosstat 15.45 0.973 10.64 16.33
20
Fig. A1. Distribution of foreign subsidiaries across size groups.
Fig. A2. Distribution of foreign subsidiaries across their mode of entry.
21
List of round-tripper countries

The list of countries, identified in our dataset as a source of round-tripping investment, is based on the list generated by the Russian
Finance Ministry in the early 2000s. Since then, some countries (e.g., Cyprus) have been removed from the official list, though they did
not cease to serve as financial hubs for Russian business. The list of home countries of round trippers in our dataset does not vary over
time and includes Andorra, Anguilla, Belize, Bermuda, Brunei Darussalam, the Cayman Islands, Cyprus, Dominica, Gibraltar, Grenada,
Hong Kong, Kiribati, Liberia, Liechtenstein, the Marshall Islands, Mauritius, the Netherlands Antilles, Panama, Saint Kitts and Nevis,
Saint Lucia, Saint Vincent and the Grenadines, Samoa, San Marino, the Seychelles, Singapore, the United Arab Emirates, and the Virgin
Islands.
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Ksenia Gonchar received her PhD from the Institute of World Economy and International Relations at the Russian Academy of Sciences, and since 2004 she has been a
leading researcher at the Institute of Industrial and Market Studies at the Higher School of Economics in Moscow, Russia. Her research interests include the economics of
innovation, the determinants and impacts of firm innovation decisions, and the study of foreign subsidiaries’ behavior in markets characterized by weak institutions. She
has published numerous articles in internationally recognized peer-reviewed journals.
Maria Greve earned her doctoral degree in economics from the University of Bremen, Germany, in July 2019. She is currently a postdoc at the Friedrich Schiller
University of Jena, Germany. She also teaches at the University of Groningen, the Netherlands. Her research interests include empirical microeconomics, transition,
regional and innovation economics, FDI studies, entrepreneurship, and the impacts of policy measures on various actors.
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Economic Systems xxx (xxxx) xxx

Contents lists available at ScienceDirect

The impact of political risk on FDI exit decisions

Available online 31 March 2022

2. Literature overview and our contribution

2.1. Theoretical background

2.2. Our contribution to the literature

4. Variables and econometric strategy

4.1. Measuring political risk and political distance

political risk on these subsidiaries.

4.3. Control variables and fixed effects

4.4. Empirical setup

Economic Systems xxx (xxxx) xxx

5.1. Effect of political risks on exits

Economic Systems xxx (xxxx) xxx

more than manufacturing and services.

5.2. The effect of individual risk components on exits

5.3. Does political distance affect an MNC’s exit decision?

Absolute political distance 1.00

Change in host-country political risk 1.97*** 1.40**

5.4. The importance of sanctions

Declaration of Competing Interest

See appendix Table A1,Table A2,Fig. A1,Fig. A2

Cyprus 3,931 1,779 14,018 65,088 2.21

Fig. A1. Distribution of foreign subsidiaries across size groups.

Fig. A2. Distribution of foreign subsidiaries across their mode of entry.

List of round-tripper countries

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Change in host-country political risk 1.97* 1.40