Government Spending Shocks and Firm Innovation

46 Pages Posted: 8 Dec 2017 Last revised: 20 May 2019

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance

Date Written: January 16, 2019

Abstract

Using news-based military build-up shocks that are exogenous to business cycle variation, we show a negative association between government spending and firm-level innovation. Firms respond to spending shocks by reducing innovation across every stage – R&D inputs, patents and new product announcements. The results are robust to alternative measures of government spending shocks, additional controls for macroeconomic conditions, and different sample periods. Consistent with the idea that a positive spending shock reduces aggregate demand and hence the incentive to innovate, we find the negative impact of government spending on innovation is stronger among firms that are more vulnerable to demand downturns. Overall, our findings suggest that government spending deters firm innovation, which is a key driver of long-run economic growth.

Keywords: Government spending, innovation, patents, R&D expenditure, new product announcements, crowding-out effect

JEL Classification: G31, G38, H32

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui and Zhang, Huizhong, Government Spending Shocks and Firm Innovation (January 16, 2019). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018. Available at SSRN: https://ssrn.com/abstract=3082217 or http://dx.doi.org/10.2139/ssrn.3082217

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Yanhui Wu

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

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