What Affects Innovation More: Policy or Policy Uncertainty?

58 Pages Posted: 18 Dec 2013 Last revised: 21 Feb 2017

Utpal Bhattacharya

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management

Po-Hsuan Hsu

University of Hong Kong

Xuan Tian

Tsinghua University - PBC School of Finance

Yan Xu

HKU, Faculty of Business and Economics

Date Written: Feb 03, 2017

Abstract

Motivated by a theoretical model, we examine for 43 countries whether it is policy or policy uncertainty that affects technological innovation more. Innovation activities, measured by patent based proxies, are not, on average, affected by which policy is in place. Innovation activities however, drop significantly during times of policy uncertainty measured by national elections. This is particularly true for more innovation-intensive industries. We use close presidential elections and ethnic fractionalization to address endogeneity concerns. We uncover the mechanism underlying the main result by showing that the number of patenting inventors decreases with policy uncertainty. Political compromise, we conclude, encourages innovation.

Keywords: Innovation, Policy uncertainty, Policy, Political party

JEL Classification: G18, G38, O31, D80, E66

Suggested Citation

Bhattacharya , Utpal and Hsu, Po-Hsuan and Tian, Xuan and Xu, Yan, What Affects Innovation More: Policy or Policy Uncertainty? (Feb 03, 2017). Kelley School of Business Research Paper No. 2014-48. Available at SSRN: https://ssrn.com/abstract=2368587 or http://dx.doi.org/10.2139/ssrn.2368587

Utpal Bhattacharya (Contact Author)

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Po-Hsuan Hsu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Yan Xu

HKU, Faculty of Business and Economics ( email )

Pok Fu Lam Road
Hong Kong
Hong Kong

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