Foreign Political Risk and Technological Change

84 Pages Posted: 27 Jan 2025

See all articles by Joel P. Flynn

Joel P. Flynn

Yale University

Antoine Levy

University of California, Berkeley

Jacob Moscona

Harvard University

Mai Wo

Yale University

Date Written: January 26, 2025

Abstract

This paper studies how innovation reacts to foreign political risk and shapes its economic consequences. We develop a model of innovation in which foreign political shocks can disrupt the supply of traded inputs, predicting that greater sector-level political risk exposure abroad leads to increased domestic innovation efforts and endogenously lower reliance on foreign inputs. We combine data on sector-level technology development with time-varying measures of sector-level exposure to foreign political risk and report three sets of empirical findings. First, sectors with higher exposure to foreign political risk exhibit significantly greater innovative activity, both in the US and globally. Second, the response of innovation is particularly strong when the risk emanates from geopolitical adversaries, consistent with the finding that policy barriers to trade are more likely to emerge between geopolitical foes in response to a rise in political risk in either country. Third, country-sector pairs that export to more innovation-intensive destinations see a greater reduction in exports following a rise in domestic political risk. This finding suggests that endogenous technological change limits reliance on risky foreign markets and thus amplifies the negative effects of political turmoil on export performance.

Suggested Citation

Flynn, Joel P. and Levy, Antoine and Moscona, Jacob and Wo, Mai, Foreign Political Risk and Technological Change (January 26, 2025). Available at SSRN: https://ssrn.com/abstract=5112377 or http://dx.doi.org/10.2139/ssrn.5112377

Joel P. Flynn (Contact Author)

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Antoine Levy

University of California, Berkeley ( email )

Jacob Moscona

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Mai Wo

Yale University ( email )

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