TCU Neeley Research Highlight – Combining Leadership experience, Neeley faculty influence industry and academic leaders through research findings.
March 31, 2024
TCU Neeley’s Morgan Swink, Eunice and James L. West Chair in Supply Chain Management and Daniel Chen, previous Professor of Information Systems and Supply Chain Management in partnership with experts investigate how uncertainty about trade policies affects firms' innovation investments by analyzing annual reports from over 3,000 Chinese companies. Their study finds that higher policy uncertainty leads firms to cut back on innovation, especially if they face less competition, have significant foreign sales, and are not state-owned. (Journal of Operations Management, 2024)
Abstract
Drawing on real options and resource dependence theories, this study examines how firms adjust their innovation investments to address trade policy effect uncertainty (TPEU), a type of firm-specific, perceived environmental uncertainty capturing managers' difficulty in predicting the impacts of potential policy changes on business operations. To develop a context-dependent, time-varying measure of TPEU, we apply bidirectional encoder representations from transformers, an advanced deep learning technique. We analyze the texts of mandatory management discussion and analysis sections of annual reports from 3181 publicly listed Chinese firms. Our sample comprises 22,669 firm-year observations spanning the years 2007 to 2019. The econometric analyses show that firms experiencing higher TPEU will reduce innovation investments. This effect is stronger for firms facing lower competition, involving more foreign sales, and not owned by the state. These findings provide clarity on previously inconclusive results by showcasing the significant influence of policy effect uncertainty, as opposed to policy state uncertainty, on firms' decisions regarding innovation investments. Additionally, these findings underscore the importance of resource dependence factors as crucial contextual factors in this decision-making process.
