Navigating uncertainty: The impact of external tensions on strategic flexibility and the role of institutional environments
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2025-07-08
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en
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This study examines how external geopolitical tensions influence strategic flexibility in defense firms and whether institutional environments moderate this relationship. Drawing on Real Option Theory (ROT), we analyze how firms in the defense industry respond to uncertainty by adjusting their investment flexibility. Using panel data from publicly listed defense firms across 28 countries from 2000-2022, we measure strategic flexibility though Real Options Intensity (ROI) and external tensions via the Geopolitical Risk Index (Caldara et al, 2022). Our findings reveal that external tensions significantly increase strategic flexibility in defense firms, supporting the theoretical prediction that uncertainty creates valuable strategic options. However, institutional differences between EU and non-EU countries do not significantly moderate this relationship, suggesting that defense firms’ responses to external tensions are relatively consistent across institutional context. These results contribute to ROT by demonstrating how macro level geopolitical events influence firm level strategic behavior and highlight the unique characteristics of the defense industry in responding to external tensions.
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Faculteit der Managementwetenschappen