The quality of political signals, reflecting policy clarity and credibility, remains a distinct but underexplored dimension of uncertainty in international studies. We investigate the influence of the quality of political signals (Q-index) in the United States (US) on the equity markets of 32 advanced and emerging economies using the Global Vector Autoregressive (GVAR) model, which also accounts for the macroeconomic conditions of the shock-recipient markets. We show an immediate negative impact on equity markets, with a response of about 0.15% to a one-standard-deviation shock to the US Q-index. However, we find clear asymmetry after decomposing the index into high- and low-quality regimes: low-quality shocks on average raise foreign equity prices by up to 0.12% but act slowly, whereas high-quality shocks reduce equity prices by a comparable magnitude but transmit more quickly. Both effects operate through the exchange-rate channel. Additional evidence involving the Global Economic Policy Uncertainty (GEPU) index reveals a contrasting pattern: GEPU shocks affect real equity prices directly and instantaneously, without exchange-rate mediation, highlighting the distinct transmission channel through which political signal quality operates. Our findings suggest that monetary authorities in trade-linked economies should monitor US political communication quality as a leading indicator of exchange-rate and equity-market pressure.
This study develops a comprehensive conceptual framework to understand how firms operating in sanctioned countries, particularly foreign multinational corporations (MNCs) in China, can effectively respond to political risks and uncertainties. Drawing on the resource dependence theory and the concept of bargaining power, this framework categorises firms into four distinct groups based on their level of resource dependence and bargaining power. This study identifies specific response strategies for each group grounded in the global value chain (GVC) literature, including GVC upgrading, geographical diversification, and switching governance modes, apart from divestment from the host country. These strategies are contingent on firms' ownership advantages, as defined in the Ownership-Location-Internalisation (OLI) paradigm, and on their level of dependence on the host country. Our findings highlight the resilience of firms that, despite geopolitical tensions, continue operating in China through strategic adjustments, demonstrating varying levels of flexibility and adaptability in managing the adverse effects of sanctions. This research contributes to the international business literature by offering insights into the complex interplay between geopolitical risks, firm strategies, and GVCs. It also provides valuable implications for policymakers and MNCs, guiding them in balancing economic interests with political realities in an increasingly complex global environment.
