Economic policy uncertainty exposure and corporate innovation investment: Evidence from China

This study investigates the impact of firms' heterogeneous exposure to economic policy uncertainty (EPU exposure) on corporate innovation investment. The results show that, first, a significant negative relationship exists between EPU exposure and corporate innovation investment, and this result continues to hold after controlling for endogeneity and conducting a series of robustness tests. Second, operational risk and financial distress are the main channels through which EPU exposure affects innovation investment. Third, firm-specific factors, such as government ownership, government subsidies, profitability, R&D personnel level, and sufficiency of net working capital, shape the relationship between EPU exposure and innovation investment. This study contributes new evidence on the impact of EPU exposure on firm behavior in China, where ongoing economic and financial reforms introduce sources of significant uncertainty.