What Affects Innovation More: Policy or Policy Uncertainty?
Hong Kong University of Science & Technology - HKUST School of Business and Management
University of Hong Kong
Indiana University - Kelley School of Business - Department of Finance
HKU, Faculty of Business and Economics
December 8, 2014
Kelley School of Business Research Paper No. 2014-48
We develop a simple model and empirically examine whether it is policy or policy uncertainty that affects technological innovation, using a large sample of 43 countries that have had various policy changes because of national elections. We find that innovation, captured by growth in patent counts, citations, and originality, is not affected by which policy (left, right, or center) is in place. Innovation, however, drops significantly during times of policy uncertainty measured by national elections. To establish causality, we use close presidential elections, whose timings are pre-determined and results are unpredictable, and ethnic fractionalization that are likely exogenous to policy and policy uncertainty. We further show that the decrease in individuals’ and organizations’ incentives to innovate during times of policy uncertainty is a possible underlying mechanism through which policy uncertainty stifles innovation. Taken together, our results confirm the predictions of our theoretical model, which is that businesses adapt to different policies, but face a problem when they do not know which policy to adapt to. Political compromise, our paper concludes, is a plus for innovation.
Number of Pages in PDF File: 52
Keywords: Innovation, Policy uncertainty, Policy, Political party
JEL Classification: G18, G38, O31, D80, E66
Date posted: December 18, 2013 ; Last revised: December 9, 2014
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