It’s a question a lot of us have been mulling over for a while now: how do American companies handle the pressure when economic giants like China roll out policies to bolster their own industries? We often hear about trade wars, tariffs, and global competition, but what really happens behind the scenes? How do U.S. firms adapt to not only survive but actually thrive amidst these challenges? Our study found some surprising answers that paint a picture of resilience and strategic adaptability.

We dove into an unprecedented attempt by merging the U.S. Census Bureau’s Longitudinal Business Database with China’s Industrial Enterprises Database. This isn’t just another look at big public companies but a deep dive into businesses of all sizes, both in the U.S. and China. By going beyond the typical analysis, we see how even small American firms adapt in the face of massive industrial shifts.

China’s Five-Year Plans, if you’re not already familiar, are strategic blueprints designed to accelerate growth in specific industries. When these plans kick into gear, they don’t just nudge the economy in a particular direction; they give it a powered shove. For U.S. firms operating in the same sectors, this can feel like a tidal wave hitting from across the Pacific. You’d think some of these companies would be crushed under such competition. Can firms without direct and targeted government backing compete with one that has a large nation’s resources behind it?

Surprisingly, that’s not what happens. While our study shows that China’s policies do increase production and can lead to displacement of U.S. production or even closure of some U.S. plants, the stock market’s reaction—or rather, the lack of it—is telling. Five-Year plans roll out at predicted intervals.  Investors didn’t seem to be as pessimistic as one might expect when Five-Year Plans are on their way. While this satisfies a lovely “parallel pre-trend” empirical researchers covet for identifying causal relations, it is perhaps also a signal that, contrary to popular belief, U.S. firms are more adaptable than we give them credit for. They’re not just sitting ducks; they’re making moves that keep them in the game, often in unexpected ways.

Let us break down two key strategies that these companies use to navigate such turbulent waters.

The first is a “strategic shift” within the U.S. market. Instead of competing directly with newly empowered Chinese firms, American companies are repositioning themselves along the supply chain. Imagine a U.S. car parts manufacturer facing a surge in Chinese electric vehicle (EV) production, fueled by government support. Instead of trying to go head-to-head with these new giants, they might shift upstream, supplying specialized materials (such as batteries) to the very Chinese companies they once saw as competitors. It’s a bit like turning a rival into a customer. Alternatively, they could move downstream and invest in electric vehicle charging infrastructure, riding the wave of demand for EVs without directly entering the crowded battery market. It’s a classic case of turning a threat into an opportunity, and it’s brilliant in its simplicity.

This strategy is akin to economic judo: the ability to absorb an opponent’s force and redirect it to your advantage. Rather than resisting the tidal wave of Chinese competition, these U.S. companies reposition themselves where they can leverage new opportunities. They don’t try to take on the heavily subsidized Chinese EV manufacturers head-on; instead, they seek out niches where they can still add value. This can mean anything from providing high-tech components and raw materials to shifting to service-based roles that support the broader EV ecosystem. It’s about remaining relevant and moving to profitability by adjusting one’s role in the supply chain.

The second strategy reallocates production across national borders. Some U.S. firms are setting up shop directly in China, diving straight into the heart of the storm. By establishing production facilities in China, these companies benefit from the same policies that might have put them out of business had they stayed on the outside. It’s like corporate judo: using your opponent’s momentum to your advantage. And it’s not just survival they’re after; they’re looking to thrive in these new conditions.

Setting up operations in China is no small feat and requires a deft understanding of local regulations, market dynamics, and cultural nuances. These companies are not simply chasing lower production costs—they’re embedding themselves in a burgeoning market that is rapidly becoming the world’s largest for many sectors, including automotive and technology. This move allows them to benefit directly from China’s industrial policies, which can include subsidies, tax breaks, and favorable financing conditions. Essentially, by becoming local players, these U.S. firms are no longer outsiders—they’re part of the system.

Of course, these bold moves require more than just guts. Financial flexibility plays a crucial role. These companies need access to capital, whether through cash reserves, equity, or debt financing, to pull off such dramatic shifts. It’s not just about having a safety net—it’s about having the resources to pivot when the world changes around you. But there’s more to it than that. “Toeholds” matter: pre-existing connections in related industries make it easier to navigate new markets. It’s much easier to jump into uncharted waters when you’ve already got one foot in the door.

These toeholds are essentially strategic footholds—long-standing relationships with suppliers, customers, or even regulatory bodies that can smooth the way for rapid adaptation. For instance, a U.S. tech company with established partnerships in China’s electronics sector can quickly pivot to support local production when new policies favor domestic production over imports. These connections provide a buffer against the shocks of sudden policy shifts and offer a launching pad for strategic maneuvers that might be out of reach for companies with less robust networks. Understanding this dynamic can also reshape how we view the role of size in business resilience. While smaller U.S. firms might be more vulnerable to global shocks at the beginning, their agility allows them to make swift adjustments that larger, more cumbersome organizations might struggle with. This is particularly true in industries where the speed of innovation is critical.

Janet Yellen’s recent remarks (in 2024) about overcapacity in some of China’s industries like electric vehicles, solar panels, and batteries reflect legitimate concerns about the pressure on U.S. industries. She pointed out that flooding global markets with cheap goods could "decimate" U.S. manufacturers. While Yellen’s worries are rooted in the immediate impact of excess supply driving down prices and displacing U.S. production, our findings show that American companies are actively adapting and evolving to these market conditions by reconfiguring their operations and production allocations, ensuring that U.S. industries remain competitive and sustainable in the long run.

These strategies don’t just reflect corporate agility; they also signal a broader lesson about the nature of competition and adaptation. It’s a reminder that, in business as in nature, survival often goes to those who can adapt to change so that they mitigate the shock or even benefit.  U.S. firms are demonstrating that, even in the face of challenges from state-backed competitors, they can find ways to innovate, collaborate, and thrive in what we hope remains largely a market economy.  These are lessons that apply far beyond the shocks from Five-Year Plans.