Transforming in Turbulent Times: The Geopolitical Risk Factor in Firm Digital Transformation

This study investigates the impact of geopolitical risk on firm’s digital transformation. Drawing on real option, financial constraint, and organization resilience perspectives, we develop two competing hypotheses. Utilizing a news-based geopolitical risk measurement, we find that geopolitical risk has a negative effect on firm digital transformation. This conclusion remains robust after adjusting for different measures of digital transformation and various fixed effects. To establish a causal relationship, we use both instrumental variable method and Difference in Difference (DID) regression and results are consistent. Additionally, our analysis indicates that financial constraints, rather than real options, are the primary channel through which geopolitical risk impacts digital transformation. Moreover, firms that engaged in international trade are more likely to reduce their efforts on DT. The implication is policymakers may be able to alleviate financial constraints and encourage digital transformation by easing monetary and fiscal policies during periods of heightened geopolitical tension. Furthermore, empirical results indicate that non-state-owned firms and enterprises in digitally disadvantaged areas exhibit heightened susceptibility to geopolitical risk.