Don’t bite off more than you can chew: commodity price volatility and corporate innovation

Xiao-Dong Xu, Juan Wang and Ya-Yu Mu

Applied Economics Letters, 2025, vol. 32, issue 2, 228-235

Abstract: The existing literature typically focuses on macroeconomic policies, firm-level characteristics, and industry competition as potential drivers of corporate innovation. In this study, we shift our focus by empirically examining the impact of a market-level factor, commodity price volatility, on corporate innovation. Drawing on the conservatism principle in risk management theory, we posit that higher commodity price volatility leads to lower corporate innovation. Consistently, we find that commodity price volatility negatively affects corporate innovation. Furthermore, we find that digital transformation alleviates the adverse impact of commodity price volatility on corporate innovation. We measure digital transformation using a new database-China Listed Firm’s Digital Transformation Research Database. We contribute to the growing literature on the economic consequences of commodity price volatility on firm-level performance. We also broaden the scope of research on corporate innovation determinants by documenting a new market-level factor (commodity price volatility). Moreover, this study has a potential policy implication: policymakers may adopt a market-driven approach (stabilizing commodity price volatility) to promote corporate innovation. Lastly, this study provides a promising avenue for future research into market-level determinants of corporate innovation.

Date: 2025
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DOI: 10.1080/13504851.2023.2266557

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