Domestic AI competition: Is DeepSeek a competitor or catalyst to Chinese AI firms?

Abstract

Using DeepSeek's artificial intelligence (AI) breakthrough as a significant event, this study examines how Chinese AI firms respond to domestic disruptive competition. We find an inverse U-shaped market reaction: initial declines due to competitive concerns, medium-term gains driven by innovation hype, and long-term reversals as optimism fades. Firms with stronger R&D capacity exhibit sustained positive returns, while state-owned enterprises (SOEs) underperform despite short-term policy-driven gains. These findings highlight that sustained AI sector growth requires more than headline innovation—it hinges on robust R&D infrastructure and institutional agility.