Uncertainty Stifles Innovation and Growth: Evidence From Geopolitical Flare-Ups

48 Pages Posted: 19 Jan 2021

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: November 1, 2020

Abstract

Using an indicator measure based on war and terror acts that is plausibly uncorrelated with local economic conditions, we document that unanticipated increases in geopolitical uncertainty cause a reduction in R&D expenditure and patenting activity in firms in the U.S. In the cross section, the impact of geopolitical uncertainty on innovation is greater for firms in industries with high innovative competition and financial market frictions. Using industry level data, we show that geopolitical uncertainty lowers long-run economic growth through each of the mechanisms. We show that our results are unlikely to be driven by omitted variable bias or measurement error.

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

JEL Classification: G32, O31, O32, E22

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui, Uncertainty Stifles Innovation and Growth: Evidence From Geopolitical Flare-Ups (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=3722797 or http://dx.doi.org/10.2139/ssrn.3722797

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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