Geopolitical Risk and R&D investment
49 Pages Posted: 2 Nov 2018 Last revised: 20 Jun 2019
Date Written: May 28, 2019
Although most empirical studies conclude that uncertainty delays firms’ investments based on real options theory, empirical evidence regarding the impact of uncertainty on innovation is mixed. This study examines the impact of geopolitical risk (GPR) on corporate research and development (R&D) investment using newly developed indices. We find a negative relationship between GPR and R&D investment. The R&D investment rapidly drops and rebounds several quarters after high GPR. The impact of GPR is most significant for high-tech firms, small firms, and firms with high growth options. However, when GPRs are realised, these significant and negative effects disappear. The analyses are shown to be robust after controlling for firm characteristics, macroeconomic environment, other uncertainty measures, time, and alternative GPR and R&D measures, as well as considering the simultaneity and endogeneity issues. Overall, our study suggests that GPR plays a key role in determining R&D investment.
Keywords: R&D; Political uncertainty; Geopolitical risk; Innovation
JEL Classification: D80, H56, O31
Suggested Citation: Suggested Citation