Although more frequent and a growing number of interstate tension is critically affecting multinational enterprises (MNEs), our knowledge on interstate tension and its effects on corporate strategy is surprisingly limited. This study attempts to shed light on this underexplored topic by examining the environmental, social, and governance (ESG) strategies of foreign MNEs in the wake of interstate tension. We argue that media-reported interstate tension plays a critical role in shaping the perception regarding interstate relations within the host country. Thus, as interstate tension increases, subsidiaries of foreign MNEs improve their ESG performance to alleviate potential institutional pressure from the public, thanks to ESG’s insurance-like benefits. We further argue and test historical conflict as one potential driving mechanism. The empirical results strongly support our theories even after accounting for various institutional characteristics of home and host countries and alternative mechanisms.
