U.S.–China tensions and corporate investment: evidence from China

Utilizing a news-based index of U.S.–China tensions (UCT), we document a significant negative correlation between UCT and Chinese firm-level capital investment. We demonstrate that heightened UCT constrains capital investment not only via the traditional channel of investment irreversibility but also by the cost-of-capital channel. Our heterogeneity analysis suggests that non-state-owned firms, firms located in less-developed regions, high-tech enterprises, and firms located in regions with lower export market diversification may experience a more pronounced decline in investment. Finally, we find that UCT exerts a positive effect on firms’ investment efficiency. Our study contributes to the literature on firm investment by highlighting that geopolitical tensions between countries can significantly influence firm investment decisions.