Does Geopolitical Risk Stifle Technological Innovation?

Posted: 14 Apr 2022 Last revised: 24 Apr 2023

See all articles by Vivek Astvansh

Vivek Astvansh

McGill University; Luddy School of Informatics, Computing, and Engineering

Wesley Deng

University of New South Wales - UNSW Business School

Adnan Habib

Independent

Date Written: December 1, 2021

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.

Suggested Citation

Astvansh, Vivek and Deng, Xiaohu and Habib, Adnan, Does Geopolitical Risk Stifle Technological Innovation? (December 1, 2021). Available at SSRN: https://ssrn.com/abstract=4047207

Vivek Astvansh (Contact Author)

McGill University ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5

Luddy School of Informatics, Computing, and Engineering ( email )

700 N. Woodlawn Avenue
Bloomington, IN 47408
United States

HOME PAGE: http://https://luddy.indiana.edu/contact/profile/index.html?Vivek_Astvansh

Xiaohu Deng

University of New South Wales - UNSW Business School ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://wesleydeng.net

Adnan Habib

Independent

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