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

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

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

  • CHEN Cheng & SENGA Tatsuro & SUN Chang & ZHANG Hongyong, 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:

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    2. Luo, Changyuan & Si, Chunxiao & Zhang, Hongyong, 2022. "Moving out of China? Evidence from Japanese multinational firms," Economic Modelling, Elsevier, vol. 110(C).
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    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.

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    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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