Trade policy uncertainty and market diversification by risk-averse firms

Zhiyuan Chen, Zhihao Wang, Ting Zhu, Kejian Gu and Ying Tang

China Economic Review, 2025, vol. 91, issue C

Abstract: This study investigates the relationship between trade policy uncertainty (TPU) and market diversification with risk-averse firms. We build a model to demonstrate how a risk-averse firm diversifies risks stemming from escalating TPU through entering new markets whose trade policies are negatively correlated with ones in its already-entered markets. The positive effect of TPU on market diversification is moderated if the firm has lower risk hedging ability and/or is less risk-averse. Conditional on the TPU in the already-entered markets, there is an inverted-U relationship between TPU in the new market and the probability of entering it. Using a unique firm-product-level dataset on Chinese exporters, we find robust evidence supporting our theoretical predictions.

Keywords: Trade policy uncertainty; New market entry; Market diversification; Risk-averse firms; Risk hedging (search for similar items in EconPapers)
JEL-codes: D81 F13 F14 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:91:y:2025:i:c:s1043951x25000586

DOI: 10.1016/j.chieco.2025.102400

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