Amid increasing geopolitical tension, governments divert to restrictive measures to enforce their foreign policy. To weaken the economies of target countries, sanctions may also impact the international operations of investors from the sender country, prompting them to divest subsidiaries in target countries despite sometimes heavy losses. According to macroeconomic findings, however, the overall effect of economic sanctions on subsidiary divestment is only limited. Firms may have strategies to avoid subsidiary divestments under sanctions, e.g., using new routes for the flow of goods and capital through auxiliary subsidiaries. As such strategies will only show at the micro level, we examine the relation between sanctions and foreign subsidiary divestments on a sample of Western MNEs and their affiliates in countries of the former Warsaw Pact, some of which had been targeted by EU’s sanctions in our observation period from 2012 to 2022. We find that economic sanctions do increase subsidiary divestments in target countries; however, the presence of auxiliary subsidiaries in commercial friendshoring locations or offshore financial centers reduces the likelihood of such divestments to a significant extent.

Sanctions represent a non-military form of response to specific events and challenges originating from abroad, which contravene the established norms and values of the imposing country or countries. Recent developments in international politics and the intensification of sanctions have spurred increased research on the impact of these sanctions across various fields, including International Business. The general stream of the current paper is international firms’ divestment from sanctioned countries under institutional disruptions, political risk, and uncertainty caused by the imposition of sanctions. The overarching research inquiry is built upon the institutional triality concept and revolves around the examination of factors influencing the decision-making process of companies regarding divestment from or persistence in the target market. We employ hierarchical logistic regression on a panel dataset of international firms that either operate within or withdraw from the Russian market from 2022 to 2024. We explore and explain the effect of country-level factors with regards to follow-the-leader strategy, such as sanctions compliance and political affinity towards the US as well as firm-level factors, such as the firm’s dependency on the US market.

We study Western firms’ response to an exogenous increase in political risk through Russia’s invasion of Ukraine. Building on the legitimacy-based view of political risk, we predict that Western firms with greater business exposure to Russia face heightened political risk in both their home countries and Russia and are thus more likely to exit Russia after its invasion of Ukraine. We further theorize that increasing public attention and greater support for Ukraine to Ukraine in Western firms’ home countries amplify the relationship between Western firms’ business exposure and their inclination to exit Russia. We empirically test our arguments in the context of Russia’s invasion of Ukraine in February 2022, which, in the eyes of Western countries, morally delegitimized Russia as a business partner and, therefore, increased legitimacy threats for Western firms with business activities in Russia. The results from these tests are in line with our arguments.

Economic sanctions are a policy tool a country’s government uses to penalize another country for violating international laws or norms. Third countries can get indirectly involved if they have trading relationships with any sanctioning or sanctioned countries. And such an impact can be significant. Existing literature has provided ample evidence of the scale and scope of these impacts and how they change the institutional landscape of countries involved in the trade war and those of third-country status. Yet the distinct responses of the third countries and their business remain undertheorized as the literature tends to undermine the unique impact of sanctions as a form of temporary institution. This paper investigates Vietnamese timber exporters in the context of US-China economic sanctions. We found that third countries’ businesses encountered both positive and negative impacts of the sanctions and employed four strategies: aligning, aspiring, influencing, and insulating. Our key contributions are how and when third-country firms intertwine reactive and anticipatory strategies. Moreover, we bring to the fore the notion of temporality – a core feature of sanctions as a coercive measure – instigating firm strategies that are more selective rather than full compliance.