US-China decoupling and the Chinese firms’ real option to defer overall but R&D investment

Abstract

The evolving decoupling between the U.S. and China, and the resulting bifurcation of the global economy, represents one of the biggest external uncertainties in international business since the end of the Cold War. From a real options perspective, this study conducted a content analysis of the annual reports of Chinese publicly-listed firms (2016–2021) to capture how these firms perceived the uncertainty stemming from decoupling and adjusted their investment strategies accordingly. The data show that the perception of decoupling uncertainty, and associated concerns of the economic downturn and profitability, triggered Chinese firms to defer overall investments. The impact is limited to manufacturing industries where investment typically is more irreversible, and private firms’ investment decisions are more subjective to the uncertainty. Moreover, the impact differs across different types of investments: decoupling uncertainty affects capital expenditure but not R&D investment. Our study sheds light on the manifestations of decoupling in firm-level investment strategies. Furthermore, the study answers the call to incorporate subjective judgment of uncertainty in the real options theory by revealing the impact of perceived uncertainty on different types of firm investments.