Does Firm Size Shape the Innovation Response to Economic Policy Uncertainty? Evidence from Chinese A-Share Listed Firms, 2007–2024

Economic policy uncertainty (EPU) is widely recognized as a macro-level force that shapes firm investment and strategic decision-making. Whether uncertainty encourages or discourages corporate innovation, however, remains one of the most contested questions in the empirical literature. This paper argues that the aggregate relationship between EPU and innovation masks critical firm-level heterogeneity, specifically, that a firm's size determines not only the magnitude but also the direction of its innovation response to uncertainty. Using a firm-level panel dataset of 5,265 Chinese A-share listed companies spanning the period 2007 to 2024 (55,309 firm-year observations), we estimate a firm fixed effects model augmented with an EPU × firm-size interaction term. Corporate innovation is measured by the log-transformed count of invention patent applications, and EPU is proxied by the Baker, Bloom, and Davis (2016) China-specific index. Our central finding is the identification of a precise firm-size threshold at total assets of approximately 320 million RMB (log assets ≈ 19.59). Below this threshold, EPU marginally suppresses innovation. Above it, EPU significantly stimulates innovation, with the effect growing stronger as firm size increases. In quantitative terms, a 100-unit increase in the EPU index is associated with a 15.3% increase in patent output for large firms, compared to only 8.4% for small firms, a differential of 82%. The near-doubling of leverage's negative effect on innovation for small firms (-0.422 vs. -0.237 for large firms) points to financial constraints as the primary mechanism underlying this asymmetry. Results are robust across quasi-Poisson regression, lagged EPU specifications (confirming a 1-2 year delayed transmission), and a dynamic panel model that estimates a long-run EPU multiplier of approximately 1.43. These findings carry direct implications for size-differentiated innovation policy design in China and other emerging economies.