Innovating Through Uncertainty: How Firms Buffer Geopolitical Risk to Sustain Financial Performance

This study investigates the impact of geopolitical risk (GPR) on corporate financial performance and examines whether innovation can mitigate the adverse effects of GPR. Using panel data on Taiwanese listed firms from 2012 to 2024, the analysis employs a fixed-effects regression model as the main estimation method, complemented by generalized estimating equations (GEE) and several additional robustness checks. To address potential endogeneity concerns, a two-stage least squares (2SLS) approach is applied, using GPR indices from Hong Kong and South Korea as instrumental variables. The empirical results show that GPR exerts a significantly negative effect on corporate financial performance. Moreover, innovation moderates this relationship, effectively reducing the detrimental impact of GPR. However, this mitigating effect was time-sensitive. Innovation implemented within the previous year continued to buffer the negative impact of GPR, whereas innovations older than two years no longer exhibited a significant moderating effect. These findings are robust across various alternative model specifications and estimation techniques. Based on these results, this study suggests that firms should strengthen and prioritize innovation activities to enhance resilience against geopolitical uncertainty. CEOs are encouraged to advance product and process innovation early in the development cycle to build strategic buffers before products enter the market. Additionally, policymakers can support corporate innovation through targeted measures such as tax incentives for high-technology equipment and streamlined procedures for patent acquisition.