Trade Policy Uncertainty And Enterprises’ Innovation

Innovation should be regarded as a strategic support for constructing a modern economic system.The capacity to innovate determines enterprises’ competitive advantage in the market,therefore their survival and future developmentHowever,the frequent occurrence of global events such as public health events and geopolitical conflicts in recent years has constantly increased China’s external uncertainty,and trade policy uncertainty has thus become the main risk element for the Chinese economy to thrive.The significant rise in trade policy uncertainty inevitably affected enterprises’ motivation to do R&D investment while leading to a risky business environment.Therefore,it has crucial to explore the impact of trade policy uncertainty on corporate innovation and its mechanism,which will help us better understand enterprises’ innovation decision when they facing trade policy uncertainty and better promote the innovation-driven strategy.This paper developed a firm-level trade policy uncertainty(TPU)during the period from 2007 to 2020,with adopting a new textual analysis approach to listed firms’ annual reports,an empirical analysis is thus conducted to study the impact of TPU on enterprise innovation.Meanwhile,this paper also discussed the TPU’s heterogeneous impact and the mechanism of how TPU affecting firm innovation.The results show that:(1)Trade policy uncertainty is an important factor affecting enterprise innovation,which demonstrates a positive effect.(2)The impact of trade policy uncertainty varies over firms and during the process of innovation.This impact is more pronounced for export firms,which directly decreased its R&D investments.The R&D investments and patent-applying amount for high-tech enterprises and state-owned enterprises were significantly higher after the TPU increase,although the innovation efficiency was not so much affected.This effect is also more significant for enterprises with larger production scales and on a mature stage.(3)Government subsidies and the financial assets holding play an important role in the positive connection between Chinese firm-level increases in TPU and subsequent firm innovation activities.Increased subsidies and lowering financialization level are good ways to mitigate the negative impact that TPU might bring and thus promote enterprise innovation.Based on the empirical analysis,this paper will humbly give some corresponding policy advice on behalf of the government and enterprise respectively.For government,since the trade policy uncertainty cannot be directly controlled,the domestic market should be stabilized or even expanded to provide sufficient room for enterprises which have relied too much on trade.Secondly,in order to mitigate this kind of negative effect,the increase of subsidies and the reduction of external financing costs for enterprises should be taken as essential measures.Finally,as TPU has a heterogeneous impact,a more inclusive and more focused policy is more desirable.For enterprises,a reliable risk prevention mechanism against trade policy uncertainty is very important.Enterprises should enhance their ability to cope with TPU and seize this opportunity to upgrade their technology.In addition,while holding financial assets can help to mitigate the adverse impact of TPU,firms should guard against the crowding-out effect of excessive financialization on corporate innovation.