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

Author

Listed:
  • Cheng Chen

    (Department of Statistics, London School of Economics)

  • Tatsuro Senga

    (Queen Mary University of London)

  • Chang Sun

    (University of Hong Kong)

  • Hongyong Zhang

    (Research Institute of Economy, Trade and Industry (RIETI))

Abstract

How do real-time expectations affect firms’ economic decisions? We provide evidence by using a dataset on Japanese multinational firms’ sales forecasts and exploring an unexpected escalation of a territorial dispute between China and Japan in 2012. Our estimation substantiates that, after the escalation of the dispute, affiliates of Japanese multinational firms in China experienced a sharp but temporary decline in total sales relative to affiliates in other countries and a more persistent decline in investment. Moreover, the territorial dispute has led to persistent pessimism in these firms’ expectations about future sales, which can explain 60% of the overall decline in investment.

Suggested Citation

  • Cheng Chen & Tatsuro Senga & Chang Sun & Hongyong Zhang, 2017. "Firm Expectations and Investment: Evidence from the China-Japan Island Dispute," Working Papers 838, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:838
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    Cited by:

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    2. 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.
    3. 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.
    4. Hyejin Kim & Jungmin Lee, 2020. "The Economic Costs of Diplomatic Conflict," Working Papers 2020-25, Economic Research Institute, Bank of Korea.
    5. 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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    More about this item

    Keywords

    forecasts; pessimistic expectations; geopolitical events; investment;
    All these keywords.

    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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