Does Geopolitical Risk Stifle Technological Innovation?

Abstract

Increasing tensions and conflicts among countries in recent years have led to a rise in geopolitical risk (GPR). Opinions and anecdotes suggest that the rising GPR is a country’s way of seizing control of technological innovation. This article empirically tests this suggestion by investigating the relation between GPR and firm-level technological innovation output. We report that an increase in GPR stifles technological innovation output. Next, we disentangle GPR into its two components: geopolitical threats and geopolitical acts. We document that the effect of threats is greater than that of acts, indicating that unrealized risk is more detrimental than realized risk. We report three potential mechanisms. First, we find that the GPR effect strengthens as a firm’s exposure to foreign product markets increases. Second, in response to rising GPR, firms lower their research-and-development investment, which in turn hurts their innovation output. Third, following a rise in GPR worldwide, more inventors leave a firm than join it. This inventor mobility explains the GPR effect substantially more than a firm’s research-and-development investment, indicating that human capital plays a larger role than managerial discretion. Our results suggest that GPR has significant impact on the real economy.