Managing Home Country Uncertainty: Impacts on the Sustainability Performance of Multinationals

We analyze how home country uncertainty affects multinationals’ sustainability performance. Building on institutional economics, we argue that home country uncertainty harms multinationals’ sustainability performance because it creates financing constraints, inducing multinationals to allocate resources and attention to compensate for low-quality institutions and restricting their focus on sustainability. However, we also propose that investing in host countries that provide fiscal arbitrage (i.e., tax havens) weakens this relationship because leveraging fiscal activities frees up resources that help multinationals reduce financing constraints, improving their sustainability performance. Finally, we propose that the availability of financial resources in firms alters these relationships because they lessen the contextual financing constraints on sustainability. Analyses of a sample of 865 European multinationals and their subsidiaries worldwide support the hypotheses.