Trade Wars and Digital Transformation: Evidence from China

Abstract

This study examines whether geopolitical uncertainty from trade wars, such as the 2018–2019 U.S.–China trade war, motivates firms to undertake digital transformation, and identifies key stakeholders driving this response in China. The research exploits the 2018–2019 trade war as a natural experiment and applies a difference-in-differences analysis on data from publicly listed Chinese firms. The trade war significantly increased firms’ digital transformation efforts. In addition, beyond top management and boards, provincial political leaders with technical backgrounds (technocrats) play a pivotal role in encouraging digital initiatives under geopolitical uncertainty. This study is among the first to link geopolitical uncertainty with increased digital transformation. It introduces a novel text-based measure of digital transformation and highlights the influence of political stakeholders in shaping firm strategy under uncertainty.