China's economic policy uncertainty and firm-level investment in Southeast Asian economies: The role of trade connection and financial development

Abstract

Previous studies primarily focus on the nexus between economic policy uncertainty and corporate investment within that country. This paper examines the impact of China's economic policy uncertainty on firm-level investment in Southeast Asian economies. Using the sample of 3600 firms in Southeast Asia over the period 2020–2021, we find that firms reduce investment when China's economic policy uncertainty increases. We investigate the effect channels and find that trade connection with China exacerbates the negative influence of China's uncertainty on capital expenditures. At the same time, a higher level of a nation's financial development weakens the impact. Our further analysis of firm features representing irreversibility shows that the effect of China's economic policy uncertainty and the mechanisms are more pronounced among firms with higher irreversibility. Our results support the option-to-delay theory and highlight the cross-border influence of policy uncertainty from major countries to smaller ones.