What Affects Innovation More: Policy or Policy Uncertainty?
Hong Kong University of Science & Technology (HKUST) - 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
April 14, 2015
Kelley School of Business Research Paper No. 2014-48
Motivated by a theoretical model, we empirically examine for 43 countries whether it is policy or policy uncertainty that affects technological innovation more. We find that innovation, measured by growth in patent counts, citations, and originality, is not, on average, affected by which policy 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. Political compromise, our paper concludes, is a plus for innovation.
Number of Pages in PDF File: 62
Keywords: Innovation, Policy uncertainty, Policy, Political party
JEL Classification: G18, G38, O31, D80, E66
Date posted: December 18, 2013 ; Last revised: April 15, 2015