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Overcoming the “diversification trap”:firm investment decisions and innovation under policy uncertainty

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  • Dai, Yixin
  • Wang, Yixiao
  • Li, Rongrong

Abstract

Existing research generally regards economic policy uncertainty (EPU) as a type of macro-shock and fails to distinguish the perception of policy uncertainty among different enterprises. We use a text mining tool to extract a measure of the EPU perceived by individual firms listed on Chinese stock markets from their annual reports between 2007 and 2020 to investigate the policy uncertainty's impact on enterprises' cross-regional investment and innovation. Our findings reveal the following. First, increased policy uncertainty will inhibit innovation in enterprises. Second, policy uncertainty reduces cross-regional investment, and the influence is time-dynamic and different under the heterogeneous enterprise characteristics. Third, the negative impact of policy uncertainty on cross-regional investment by enterprises is primarily reflected in investments unrelated to the enterprise's technology. Policy uncertainty will promote investment in technology-related areas. Finally, the impact of policy uncertainty and an increase in technology-related cross-regional investment will help (1) lower financing costs via the signal effect, (2) broaden knowledge, and (3) strengthen enterprise resilience and thus promote innovation.

Suggested Citation

  • Dai, Yixin & Wang, Yixiao & Li, Rongrong, 2024. "Overcoming the “diversification trap”:firm investment decisions and innovation under policy uncertainty," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 492-504.
    • Handle: RePEc:eee:reveco:v:91:y:2024:i:c:p:492-504
    DOI: 10.1016/j.iref.2024.01.024
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    More about this item

    Keywords

    Policy uncertainty; Cross-regional investment; Enterprise innovation;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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