The Uncertainty – Innovation Nexus: A Tale of Three Types

56 Pages Posted: 7 Jan 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)

Date Written: December 22, 2018

Abstract

In this paper, we examine the implications of macroeconomic, geopolitical, and policy uncertainties on firm innovation. We find that macroeconomic and geopolitical uncertainties significantly hinder corporate innovation. Effects of policy uncertainty on innovation are more complex and depend on ex-ante expectations of the underlying policy. Policy related uncertainty increases innovation during Republican administrations since ex-ante expectations of Republican policies are, on average, more business friendly than Democratic policies. In contrast, policy uncertainty decreases innovation during Democratic administrations. We document that firms with high R&D intensity and high growth options are more sensitive to changes in all three forms of uncertainty.

Keywords: uncertainty, innovation, partisan cycle

JEL Classification: D80, E22, E66, G18, G31, G38

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui, The Uncertainty – Innovation Nexus: A Tale of Three Types (December 22, 2018). Available at SSRN: https://ssrn.com/abstract=3305706 or http://dx.doi.org/10.2139/ssrn.3305706

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

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