Exploring the impact of US-China tensions on innovation outputs: The moderating role of the financial sectors in both countries

Abstract

The escalating geopolitical tensions between the United States and China have sparked considerable debate about their implications for global innovation and economic stability. This study examines the impact of these tensions on innovation performance, specifically focusing on trademark output and exports of information and communication technology products. It further explores how financial sector development moderates this relationship. Using annual data from 1993 to 2023 and applying Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimation techniques, the findings reveal that United States–China tensions positively influence innovation outputs in both countries. Specifically, a one-unit increase in geopolitical tension is associated with a 0.005–0.006 increase in trademark output and a 0.008–0.010 rise in information and communication technology exports. Financial sector development independently contributes positively to innovation; however, its interaction with geopolitical tensions exhibits divergent effects. In the United States, financial development strengthens the positive impact of tensions on innovation. In contrast, for China, the interaction term is significantly negative (−0.331 to −0.427), suggesting that financial sector development may exacerbate the adverse effects of geopolitical uncertainty on innovation. These findings highlight the complex, country-specific dynamics between finance, innovation, and global political relations. The study offers critical insights for policymakers in both countries, urging tailored financial and innovation policies in the face of sustained geopolitical rivalry.