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Firm Expectations and Investment: Evidence from the China-Japan Island Dispute

Author

Listed:
  • Cheng CHEN
  • Tatsuro SENGA
  • Chang SUN
  • Hongyong ZHANG

Abstract

How do firm expectations affect their economic decisions? We provide evidence using a novel dataset on Japanese multinational firms' sales forecasts and exploring an unexpected escalation of a territorial dispute between China and Japan in 2012. The empirical analysis shows that after the escalation of the dispute, affiliates of Japanese multinational firms in China experienced a protracted decline in sales and investment, which had not recovered until the end of this study (2015Q1). We further document a similar drop in firms' sales forecasts and that firms under-predicted sales in 2013 and 2014. Finally, we estimate the effect of firm expectations on investment, and a back-of-envelope calculation shows that the under-forecasting of sales can explain 20 to 60 percent of the decline in investment.

Suggested Citation

  • Cheng CHEN & Tatsuro SENGA & Chang SUN & Hongyong ZHANG, 2016. "Firm Expectations and Investment: Evidence from the China-Japan Island Dispute," Discussion papers 16090, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:16090
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    Cited by:

    1. Chen, Cheng & Senga, Tatsuro & Sun, Chang & Zhang, Hongyong, 2023. "Uncertainty, imperfect information, and expectation formation over the firm’s life cycle," Journal of Monetary Economics, Elsevier, vol. 140(C), pages 60-77.
    2. Belke, Ansgar & Volz, Ulrich, 2018. "Capital flows to emerging market and developing economies: global liquidity and uncertainty versus country-specific pull factors," IDOS Discussion Papers 23/2018, German Institute of Development and Sustainability (IDOS).
    3. Luo, Changyuan & Si, Chunxiao & Zhang, Hongyong, 2022. "Moving out of China? Evidence from Japanese multinational firms," Economic Modelling, Elsevier, vol. 110(C).
    4. Hyejin Kim & Jungmin Lee, 2021. "The Economic Costs of Diplomatic Conflict: Evidence from the South Korea–China THAAD Dispute," Korean Economic Review, Korean Economic Association, vol. 37, pages 225-262.
    5. Hyejin Kim & Jungmin Lee, 2020. "The Economic Costs of Diplomatic Conflict," Working Papers 2020-25, Economic Research Institute, Bank of Korea.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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