Geopolitical Fault Lines: Alignment, Volatility, and Cross-Border Collaborations

In the context of increasing geopolitical hostilities and ideological conflicts, we investigate the effect of geopolitical alignment -- similarity of national interests between countries in global affairs -- on firms’ strategic repositioning of innovation ties. We argue that geopolitical alignment affects how firms anticipate the reliability of partners and institutions in safeguarding shared value creation. As geopolitical tensions rise, governments and local stakeholders become less likely to credibly commit to honoring agreements and more likely to expropriate/misappropriate intellectual property. Antagonism between a firm’s home country and a foreign country fosters animosity between their citizens, undermining trust and leading to a reduction in innovation ties. Furthermore, we show that the interplay between the level of geopolitical alignment and the propensity for sudden and unpredictable shifts in that alignment -- i.e., volatility in geopolitical affinity -- shapes overall uncertainty and gives rise to nuanced pattern of cross-border activities among firms. Analyzing 1,685 US public firms and their innovation ties across 25 countries from 2000 to 2022, we find support for our hypotheses.