Tariffs, Geopolitical Risks, and Location Choices of Multinational Enterprises

The recent rise in anti-globalization sentiment has renewed interest in how tariffs influence the location decisions of multinational enterprises (MNEs). However, these decisions have also been reshaped by ongoing geopolitical tensions-a factor that remains underexplored in the existing literature. In this study, we construct a panel dataset comprising 283,272 country-country-industry observations spanning the years 2009 to 2021. The data are drawn from the WITS, BvD, World Bank, and GDELT databases. Using fixed-effects regression, fixed-effects logit, and fixed-effects negative binomial models, we examine how MNEs respond to tariffs under varying levels of geopolitical risk. Our analysis yields three key insights. First, in contexts of low or no geopolitical risk, higher tariffs increase the likelihood of international investment by MNEs, consistent with the “tariff jumping” hypothesis. However, under high geopolitical risk, this effect disappears-regardless of tariff levels, MNEs are not more likely to invest abroad. Second, tariff increases can escalate low levels of geopolitical tension between home and host countries, further discouraging international investment. In contrast, high levels of geopolitical risk are not significantly correlated with tariff changes. Third, when low-level geopolitical tensions arise, MNEs may redirect investment to neighboring countries or major trading partners of the host country as a way to access its market indirectly.