Geopolitical hostility and corporate innovation: Evidence from US high-tech firms in trade sectors with China

Abstract

This study aims to empirically examine whether and how the innovation activities would change in the face of shocks caused by heightened US-China tensions for US high-tech firms from trade sectors with China. It is found that although the overall innovation intensity slides down during periods of heightened geopolitical risk and policy uncertainty, innovativeness of the US high-tech companies from trade sectors with China is not completely suppressed by the escalated tensions and still maintains certain levels of momentum compared with other firms. However, the empirical evidence demonstrates that the superiority of the innovation intensity of US high-tech companies from trade sectors with China to other firms is curbed during periods of heightened tensions in comparison with periods in the absence of geopolitical shocks and economic uncertainty. Moreover, the negative impact of US-China tensions on corporate innovation is further amplified when the firm is less established, more financially constrained and of smaller size and less human power capital, each of which serves as an important moderator driving the negative relation. The findings of the paper are based on multifaceted empirical methods and contribute to the literature on corporate innovation, international trade, and geopolitical and economic tensions between nations.