Adapting Innovation When Facing Economic Uncertainty

Abstract

This study provides evidence that firms adapt to macroeconomic, real, or financial economic uncertainty by decreasing their innovation activities. The way firms adapt is related to both internal factors such as patent types (exploratory versus exploitative patents), asset redeployability, patent assignments, and financial constraints, as well as external factors such as earnings pressure from myopic investors. The negative relationship with uncertainty is exaggerated by financial constraints and mitigated by redeployability while the detrimental effects of myopic investors on innovation are greatly dampened during periods of high economic uncertainty.

Keywords: Innovation, Economic Uncertainty, Redeployability, Myopic Investors

JEL Classification: O32, G3, G32