Geopolitical tensions and firm innovation: institutional responses of Chinese MNEs amid the U.S.–China trade war

Purpose This study aims to investigate how geopolitical tensions shape firms’ innovation strategies. The effects on both incremental and radical innovation were examined in the context of the USA–China trade war. The moderating role of performance relative to aspirations (PRA) was further explored. Design/methodology/approach This study used a multi-source panel data set of 339 Chinese multinational enterprises with subsidiaries in the USA. From 2012 to 2022, and tested this study’s hypotheses using a staggered difference-in-differences approach with firm and year fixed effects. Findings Firms in industries exposed to the US Entity List are more likely to increase radical innovation while decreasing incremental innovation. The negative effect on incremental innovation is amplified when performance falls below aspirations, while the positive effect on radical innovation is strengthened when performance exceeds aspirations. Originality/value This study contributes to the intersection of geopolitical and firm innovation strategy. It reveals how geopolitical tensions, along with firms’ PRA, interact to shape their innovation strategies, offering new insights into corporate innovation under geopolitical tensions.