The Uncertainty – Innovation Nexus: A Tale of Three Types
56 Pages Posted: 7 Jan 2019
Date Written: December 22, 2018
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
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