Navigating economic policy uncertainty: The role of digital transformation in export product switching

• Published date: 01 December 2024
• Author: Xiaohui Xu,Ruizhen Dong
• Date: 01 December 2024
• DOI: http://doi.org/10.1111/asej.12339

ORIGINAL ARTICLE

Navigating economic policy uncertainty: The role of

digital transformation in export product switching

Xiaohui Xu | Ruizhen Dong

School of Economics and Management, Zhejiang Sci-Tech University, Hangzhou, China

Correspondence

Xiaohui Xu, School of Economics and Management, Zhejiang Sci-Tech University, Hangzhou 310018, China.

Email: xuxiaohui@zstu.edu.cn

Funding information

Major Humanities and Social Sciences Research Projects in Zhejiang Universities, Grant/Award Number:

2023QN093; Ministry of Education Humanities Social Sciences Research Project, Grant/Award Number:

23YJC790165

Abstract

This study explores two key objectives: examining the impact of economic policy uncer-

tainty (EPU) on export product switching and assessing the role of digital transformation

in moderating this relationship. Analyzing data from Chinese A-share listed enterprises

between 2007 and 2016, we find that heightened EPU significantly accelerates export

product switching, leading firms to reduce both the scope (number of products exported)

and quantity of their exports. Digital transformation plays a crucial role in mitigating the

adverse effects of EPU by enhancing information-processing capabilities and reducing

information asymmetry. This strategic shift encourages firms to focus on core products

while reducing non-core product exports. The moderating effect of digital transformation

is particularly significant in state-owned enterprises (SOEs) and firms with weak internal

corporate governance. These findings underscore the critical role of digital transforma-

tion in helping firms navigate uncertain economic environments, offering valuable

insights for policymakers and business leaders aiming to enhance export performance

through digital innovation.

KEYWORDS

digital transformation, economic policy uncertainty, export product switching, information-

processing capabilities

JEL CLASSIFICATION

F10, C51

DOI: 10.1111/asej.12339

© 2024 East Asian Economic Association and John Wiley & Sons Australia, Ltd.

Received: 8 August 2023; Accepted: 5 September 2024

Asian Econ. J. 2024;38:435–455. wileyonlinelibrary.com/journal/asej 435

1|INTRODUCTION

Economic policy uncertainty (EPU) has become a significant factor shaping

firm behavior in today’s volatile global economy. Extensive research has shown

that EPU affects export activities. For instance, Borojo et al. (2022) found that

EPU negatively affects both the intensive and extensive margins of trade, while

Manova and Yu (2017) observed that firms often adjust their product offerings

in response to rising uncertainty. However, there is limited research exploring

how EPU drives export product switching.

EPU is inherently a subjective perception among economic agents, includ-

ing consumers, managers, and policymakers, about potential changes in eco-

nomic policies. These perceptions, often shaped by limited or asymmetric

information and constrained information-processing capabilities (Fang

et al., 2023), leading to varying impacts. In this context, digital transforma-

tion emerges as a powerful tool that can influence how firms perceive and

respond to EPU.

This study addresses two objectives: (1) to examine the effect of EPU on

export product switching and (2) to explore how digital transformation influ-

ences this relationship. Using a dataset of 5414 observations from Chinese

A-share listed companies from 2007 to 2016, we develop an firm-level EPU per-

ception index and a digital transformation index. Our findings reveal that

heightened EPU accelerates export product switching, prompting firms to

reduce both the scope and quantity of their exports. Furthermore, digital trans-

formation enhances firms’information-processing capabilities and reduces

information asymmetry. This enables firms to shift focus away from non-core

product exports, emphasizing core products and optimizing resource allocation.

This effect is pronounced in state-owned enterprises (SOEs) and firms with weak

internal corporate governance.

The contributions of this study are threefold. First, by introducing an firm-

level EPU perception index, we provide a more granular understanding of how

individual firms perceive and respond to EPU, offering insights beyond macro-

level data. Second, we uniquely link digital transformation to firms’strategic

responses to EPU, particularly in the context of export product switching.

Finally, our research extends the literature by examining how digital capabilities

can modify the relationship between external uncertainties, such as EPU, and

firm-level strategic decisions.

The remainder of this article is structured as follows: Section 2 reviews

the relevant literature and formulates the hypotheses. Section 3 outlines the

research design. Section 4 presents the empirical findings. Section 5 dis-

cusses the results of the mechanism tests and heterogeneity checks. The

final section concludes with a summary of key findings and their

implications.

436 XU and DONG