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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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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2017/items/wp838c.pdf
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    References listed on IDEAS

    as
    1. Olivier Coibion & Yuriy Gorodnichenko & Saten Kumar, 2018. "How Do Firms Form Their Expectations? New Survey Evidence," American Economic Review, American Economic Association, vol. 108(9), pages 2671-2713, September.
    2. Christoph E. Boehm & Aaron Flaaen & Nitya Pandalai-Nayar, 2019. "Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake," The Review of Economics and Statistics, MIT Press, vol. 101(1), pages 60-75, March.
    3. Venky Venkateswaran & Laura Veldkamp & Julian Kozlowski, 2015. "The Tail that Wags the Economy: Belief-Driven Business Cycles and Persistent Stagnation," 2015 Meeting Papers 800, Society for Economic Dynamics.
    4. Bachmann, Rüdiger & Elstner, Steffen & Hristov, Atanas, 2017. "Surprise, surprise – Measuring firm-level investment innovations," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 107-148.
    5. Tatsuro Senga, 2014. "A New Look at Uncertainty Shocks: Imperfect Information and Misallocation," UTokyo Price Project Working Paper Series 042, University of Tokyo, Graduate School of Economics.
    6. MORIKAWA Masayuki, 2013. "What Type of Policy Uncertainty Matters for Business?," Discussion papers 13076, Research Institute of Economy, Trade and Industry (RIETI).
    7. Olivier Coibion & Yuriy Gorodnichenko & Rupal Kamdar, 2018. "The Formation of Expectations, Inflation, and the Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1447-1491, December.
    8. MORIKAWA Masayuki, 2016. "Policy Uncertainty: Evidence from survey data (Japanese)," Policy Discussion Papers (Japanese) 16005, Research Institute of Economy, Trade and Industry (RIETI).
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    Citations

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    Cited by:

    1. CHEN Cheng & SENGA Tatsuro & SUN Chang & ZHANG Hongyong, 2018. "Uncertainty, Imperfect Information, and Expectation Formation over the Firm's Life Cycle," Discussion papers 18010, Research Institute of Economy, Trade and Industry (RIETI).
    2. 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

    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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