Geopolitical Risk and Corporate Innovation

Abstract

Using both narrative-based and newspaper frequency-based measures that are plausibly uncorrelated with variation in business cycle, we document that increases in transnational geopolitical risk cause a reduction in R&D expenditure and patenting activity for a sample of publicly listed firms in the U.S. Whereas the effects of policy-related uncertainty and general macroeconomic uncertainty are stronger for domestic firms, the effects of geopolitical risk on innovation are significantly greater for firms with global exposure, i.e. firms with international segments and foreign income. The adverse effects of geopolitical risk on innovation are exacerbated for firms in industries with high creative destruction.

Keywords: Geopolitical Risk, Innovation, Patenting, R&D, Patent Value, Geopolitics

JEL Classification: G32, O31, O32, E22