The Impact of Economic Policy Uncertainty on Firm Markups and Business Sustainability: The Moderating Effect of Irreversible Investment and Innovation

Xingqun Xue (), Xinyu Zhou, Xiaofeng Zhang and Xinying Yang
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Xingqun Xue: School of Economics and Management (School of Tourism), Dalian University, Dalian 116622, China
Xinyu Zhou: School of Economics and Management (School of Tourism), Dalian University, Dalian 116622, China
Xiaofeng Zhang: School of Economics and Management (School of Tourism), Dalian University, Dalian 116622, China
Xinying Yang: School of Economics and Management (School of Tourism), Dalian University, Dalian 116622, China

Sustainability, 2025, vol. 17, issue 11, 1-16

Abstract: Incorporating economic policy uncertainty into the Melitz and Ottaviano theoretical model, this study systematically examines the impact of economic policy uncertainty on firm markups, contributing to our understanding of how macroeconomic conditions affect business sustainability. The results reveal a significant negative relationship between economic policy uncertainty and firm markups, with particularly adverse effects observed in labor-intensive industries, smaller firms, and export-driven companies. As investment irreversibility increases, so does the detrimental impact of economic policy uncertainty on business markups. Importantly, it is discovered that innovation efforts can mitigate these negative effects, promoting sustainable business practices under high policy uncertainty. This research extends the mechanism through which EPU affects markups and highlights the critical roles of investment irreversibility and innovation behavior as moderators. By exploring these dynamics, our findings contribute to the broader discourse on sustainability by identifying strategies for enhancing corporate resilience and competitiveness amidst economic uncertainties.

Keywords: economic policy uncertainty; firm markups; business sustainability; investment irreversibility; innovation (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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