Title: A window of opportunity or minefield of risk: vertical trade policy uncertainty and firms' innovation

Authors: Keyu Fu; Jing Zhao; Limin Zhu

Addresses: School of Management, Xi'an University of Architecture and Technology, No. 13 Yanta Road, Xi'an, Shaanxi Province, 710055, China ' School of Business, Renmin University of China, No. 59, Zhongguancun Street, Haidian District, Beijing, 100872, China ' School of Management, Minzu University of China, No. 27, Zhongguancun South Street, Haidian District, Beijing, 100081, China

Abstract: The effect of upstream and downstream trade policy uncertainty (TPU) on firms' innovation output has attracted growing academic attention in recent years; however, a consistent conclusion has not yet been reached. By leveraging real options theory, our study attempts to reconcile the difference in previous studies and reveals that vertical TPU has an inverted U-shaped relationship with the focal firm's innovation output. We present two opposing effects: the innovation opportunity and innovation risk mechanisms. Combining the static and dynamic perspectives of the supply chain, we suggest that supply chain concentration weakens the inverted U-shaped relationship, while supply chain stability strengthens it. The empirical results for the Chinese-listed firms support our predictions. Our study contributes to the literature on TPU and supply chain management and echoes the call for the real options theory to strike a balance between flexibility and commitment. We suggest that firms assess their degree of vertical TPU and strategically choose the best combination of supply chain concentration and stability to facilitate innovation.

Keywords: trade policy uncertainty; TPU; innovation output; real option theory; supply chain management.

DOI: 10.1504/IJTM.2025.151674

International Journal of Technology Management, 2025 Vol.98 No.2/3/4, pp.143 - 173

Received: 28 Jan 2024
Accepted: 13 Feb 2025
Published online: 13 Feb 2026 *

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