No. 838: Firm Expectations and Investment: Evidence from the China-Japan Island Dispute
Cheng Chen Department of Statistics, London School of Economics Tatsuro Senga Queen Mary University of London Chang Sun University of Hong Kong Hongyong Zhang Research Institute of Economy, Trade and Industry (RIETI)
October 14, 2017
Abstract
How do real-time expectations affect firms’ economic decisions? We provide evidence by using a dataset on Japanese multinational firms’ sales forecasts and exploring an unexpected escalation of a territorial dispute between China and Japan in 2012. Our estimation substantiates that, after the escalation of the dispute, affiliates of Japanese multinational firms in China experienced a sharp but temporary decline in total sales relative to affiliates in other countries and a more persistent decline in investment. Moreover, the territorial dispute has led to persistent pessimism in these firms’ expectations about future sales, which can explain 60% of the overall decline in investment.
J.E.L classification codes: E22, E32, D84, F51
Keywords: forecasts, pessimistic expectations, geopolitical events, investment