How Does Geopolitical Risk Affect Corporate Innovation? Evidence from China’s Listed Companies

Abstract

ABSTRACT Unlike most previous studies focused on the impact of domestic risk on firms’ innovation activities, this research places more effort on identifying whether and how geopolitical risk affected corporate innovation behavior in China over the period 2003–2019. By constructing firm-level panel data that combine financial information with data on geopolitical risk and patenting activity, we find that geopolitical risk exerts a negative impact on firms’ innovation activity through increased external financing costs and by reducing firms’ willingness to raise capital. This inhibitory effect is more pronounced for companies with high innovation capability, export-oriented firms, and firms facing higher macro-risk exposure. In addition, political connection can alleviate these restricting effects of geopolitical risk on firm innovation. Knowledge of these impacts should help firm managers, government, and policymakers to develop more efficient development strategies and mitigate the impact of such risk on corporate operations.