US–China Tension Relationship and Firm Innovation: Evidence From China

ABSTRACT This paper investigates the effect of US–China tension relationship on Chinese firm innovation. Using a sample of Chinese A‐share companies from 2003 to 2023, we find robust evidence that US–China tension relationship, which is measured by US–China tension index, significantly encourages firms’ patent application, particularly substantive patents. Meanwhile, this positive relationship can continue for 3 years. Specifically, we also show that this positive effect is more profound for state‐owned enterprises and enterprises with lower financial constraint. Moreover, increased government subsidy is plausible channel that allows US–China tension relationship to promote innovation. Overall, these results shed light on the real effects of US–China relationship and the determinants of firm innovation.