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
Tsinghua University - PBC School of Finance
HKU, Faculty of Business and Economics
Feb 03, 2017
Kelley School of Business Research Paper No. 2014-48
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.
Number of Pages in PDF File: 58
Keywords: Innovation, Policy uncertainty, Policy, Political party
JEL Classification: G18, G38, O31, D80, E66
Date posted: December 18, 2013 ; Last revised: February 21, 2017