Trade Policy Uncertainty, Financing Constraints, and Firm Innovation: Evidence from China

In 2001, China’s accession to the World Trade Organization and the attainment of permanent Most Favored Nation (MFN) status from the USA significantly reduced external trade policy uncertainties for the country. Utilizing comprehensive data from 1998 to 2006, this paper employs a Difference-in-Differences (DID) regression approach to dissect the intricate relationship between trade policy uncertainties, financing constraints, and enterprise innovations. Our findings reveal that a notable decrease in trade policy uncertainties has considerably spurred innovation among Chinese enterprises, particularly for high-productivity firms and regions with advanced marketization. However, this effect is mitigated by financing constraints. The uniqueness of this paper lies in its detailed exploration of how trade policy uncertainties influence enterprise innovation through financing constraints. Specifically, the reduction in uncertainties boosts corporate profitability, fosters the growth of cluster commercial credit, and enhances credit resource allocation efficiency. Consequently, it alleviates financial pressures on enterprises, thereby facilitating innovation. While our data covers the period from 1998 to 2006, the insights remain relevant in the current global trade environment characterized by heightened uncertainties. Future research could validate these findings using updated data or investigate how emerging technologies like fintech and blockchain finance can alleviate financing constraints, thus aiding businesses in navigating trade policy uncertainties.