We study firms’ reaction to an exogenous increase in the political risk associated with doing business in a foreign country that suddenly becomes delegitimized. Building on a legitimacy-based framework of political risk, we argue that business conduct in the delegitimized country creates legitimacy threats for firms as the population in the firms’ home countries contests the continuation of operations in the delegitimized country. In line with this argument, we contend that the extent of legitimacy threats firms experience is a function of their business exposure to the delegitimized country and, thus, that firms with greater business exposure to the delegitimized country are more likely to exit it. We further hypothesize that two forces, one on the level of firms’ home countries—greater public attention to the delegitimized country—and the other on the level of the host country—the degree to which the host country perceives firms’ home countries as adversaries—will strengthen the relationship between firms’ business exposure to the delegitimized country and the extent of legitimacy threats. 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. We conduct additional analyses to corroborate that legitimacy threats are the key mechanism explaining Western firms’ exits from Russia and test whether firms that exited Russia increased their business activity in neighboring post-Soviet countries. Empirical results lend full support to our theoretical arguments and reveal that Western firms that exited the Russian market indeed appear to re-direct their business with Russian customers to post-Soviet countries.
