Supply Chain Uncertainty and Innovation in Chinese Firms: Evidence from Firm-level Data along the China-US Supply Chain
PAN Yukun, DU Qianqian, GONG Qiang, YE Kuicheng
School of Accounting, Dongbei University of Finance and Economics; Research Institute of Economics and Management, Southwestern University of Finance and Economics; Wenlan School of Business, Zhongnan University of Economics and Law
Summary:
Amid the unprecedented transformations in the global landscape, the global political and economic order is undergoing profound changes, and the increasingly complex political and economic relations between China and the United States have significantly increased the uncertainty of the supply chains of the two countries. In particular, the intensifying competition in critical technologies and “bottleneck” areas has emerged as a crucial factor shaping the strategic rivalry between the two nations. In this context, technological innovation serves not only as a cornerstone of strategic competition among major powers but also as a key driver of resilience in industrial and supply chains. By strengthening technological innovation, countries can safeguard national security and economic stability more effectively, reduce dependence on external technologies, and enhance the autonomy, controllability and risk resistance of their industrial chains. Moreover, technological innovation is an essential engine for developing new quality productive forces, enabling countries to occupy the commanding heights of technology and industrial development in the global competition and further enhancing the country's comprehensive economic strength and international discourse power. Therefore, how Chinese firms embedded in cross-border supply chains respond to the shocks of China-US supply chain uncertainty has become a critical issue for enhancing the resilience and security of industrial and supply chains and ensuring high-quality economic development. This study constructs a China-US supply chain uncertainty index based on textual analysis of over 700,000 analyst reports on U.S. listed companies and more than 200,000 analyst reports on Chinese listed companies. Combining this index with unique firm-level supplier-customer relationship data along the China-US supply chain, we systematically examine the impact of the China-US supply chain uncertainty on innovation activities of Chinese firms. As an external source of uncertainty, China-US supply chain uncertainty is theoretically analyzed and predicted within the theoretical frameworks of real options theory and investment irreversibility theory. Real options theory emphasizes that firms should maintain strategic flexibility under uncertainty and adjust their decisions dynamically as actual future conditions unfold, while investment irreversibility theory posits that irreversible investments require a careful trade-off between potential returns and risks. Accordingly, heightened uncertainty often leads firms to postpone investment decisions, waiting for more information or clearer market conditions before acting. Therefore, we expect that rising China-US supply chain uncertainty significantly suppresses both innovation input and output of Chinese firms embedded in the supply chain. Our China-US supply chain data is drawn from the FactSet Revere database; U.S. analyst reports are sourced from the Thomson Reuters database; Chinese analyst reports come from Eastmoney; Chinese listed firms' financial data is from the China Stock Market & Accounting Research (CSMAR) database; patent data is from the Chinese Research Data Services (CNRDS) database; and macroeconomic data is obtained from various editions of the China Statistical Yearbook. Empirical results indicate that China-US supply chain uncertainty increases firms' risk aversion, leading them to reduce innovation input and thus reduce innovation output out of prudence. This finding remains robust after a series of robustness checks. Mechanism analyses further reveal that the negative effect operates primarily through two channels: enhanced investment irreversibility and deteriorated financing conditions. Heterogeneity analyses show that high-tech firms are better able to sustain innovation investment in the face of rising China-US supply chain uncertainty compared to non-high-tech firms, and that government support can mitigate the adverse impact of such uncertainty on firm innovation. This study makes several contributions. First, it extends the existing literature by offering a novel perspective on economic and political uncertainty. Previous studies have primarily relied on the economic policy uncertainty index developed by Baker et al. (2016), which focuses on measuring a country's overall economic policy uncertainty and does not capture uncertainty in inter-country relations. By conducting textual analysis of U.S. and Chinese analyst reports, this study constructs a bilateral supply chain uncertainty index, providing a new quantitative approach to measure uncertainty. Second, it enriches the literature on the impact of uncertainty on micro firms by examining the effects of cross-national rather than purely domestic uncertainty, using high-granularity micro-level supply chain data from both China and the U.S. and analyzing the asymmetric innovation responses of suppliers and customers, thereby broadening the perspective on supply chain research. Third, this study provides policy relevant empirical evidence for policymakers. As the most important and enduring source of global economic policy uncertainty, China-US relations continue to exert far-reaching effects on the security and resilience of China's industrial chains at present and into the foreseeable future. Our findings suggest that the government can enhance firms' capacity to cope with external uncertainty and foster innovation upgrading by more effectively employing tax, fiscal, and industrial policies, thereby safeguarding supply chain security and strengthening overall economic resilience.
潘玉坤, 杜茜茜, 龚强, 叶奎成. 供应链不确定性与中国企业创新——基于中美供应链微观企业数据的分析[J]. 金融研究, 2025, 542(8): 75-92.
PAN Yukun, DU Qianqian, GONG Qiang, YE Kuicheng. Supply Chain Uncertainty and Innovation in Chinese Firms: Evidence from Firm-level Data along the China-US Supply Chain. Journal of Financial Research, 2025, 542(8): 75-92.
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