Weathering the policy Storm: How trade uncertainty shapes firm financial performance through innovation and operations

Abstract

This study investigates how firms navigate the challenges posed by trade policy uncertainty (TPU) and how such uncertainty translates into variations in corporate financial performance (CFP). Using panel data from Chinese listed firms spanning 2011 to 2022, the analysis reveals that elevated TPU significantly impairs firm performance. The adverse effects are transmitted through two key operational mechanisms: reduced technological innovation and diminished supply chain efficiency. As firms respond to uncertain trade environments, they often cut back on long-term innovation initiatives and face logistical disruptions, both of which erode financial outcomes. Importantly, the degree of vulnerability to TPU is not uniform. State-owned enterprises and large firms exhibit greater financial stability, while firms with advanced digital capabilities demonstrate enhanced adaptability. Industry competitiveness also conditions the extent of TPU’s impact. These findings offer new insights into how organizational and structural factors shape firms’ ability to withstand policy-driven external shocks.

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