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What Affects Innovation More: Policy or Policy Uncertainty?

Published online by Cambridge University Press:  29 August 2017

Utpal Bhattacharya ,
Po-Hsuan Hsu ,
Xuan Tian  and
Yan Xu
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Abstract

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Motivated by a theoretical model, we examine for 43 countries whether it is policy or policy uncertainty that affects technological innovation more. Innovation activities, measured by patent-based proxies, are not, on average, affected by which policy is in place. Innovation activities, however, drop significantly during times of policy uncertainty measured by national elections. The drop is greater for more influential innovations (citations in the right tail, exploratory rather than exploitative innovations) and for innovation-intensive industries. We use close presidential elections and ethnic fractionalization to address endogeneity concerns. We uncover the mechanism underlying the main result by showing that the number of patenting inventors decreases with policy uncertainty. Political compromise, we conclude, encourages innovation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 5 , October 2017 , pp. 1869 - 1901
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

We are grateful for helpful comments from Tim Adam, Geert Bekaert, Jonathan Brogaard, Yenn-Ru Chen, Cyrus Chu, Art Durnev, Jarrad Harford (the editor), Harald Hau, Erik Hurst, Kanhon Kan, Andrew Karolyi, Margaret Kyle, Rafael La Porta, Florencio Lopez-de-Silanes, Gustavo Manso, Ronald Masulis, Lubos Pastor, Gordon Phillips, Andrea Prat, Rene Stulz, Krishnamurthy Subramanian (the referee), Han Xia, Zhaoxia Xu, Youngsuk Yook, Alminas Zaldokas, and seminar and conference participants at Academia Sinica, Indiana University, National Taiwan University, University of Hong Kong, the 2015 Financial Management Association Asian Meeting, the 2015 Taiwan Finance Association Annual Meeting, the 2014 China International Conference in Finance, and the 2014 European Finance Association Conference. We thank Jiyao Fan, Michael Flores, Xiaowen Jin, Amit Kumar, Yunan Liu, Nikhil Singh, and Tong Zhou for their research assistance. Hsu and Xu acknowledge the support from the General Research Fund sponsored by the Research Grants Council in Hong Kong (Refs. 17500015 and 17502514). Tian acknowledges financial support from Tsinghua University Research Grant (Project No. 20151080451). We remain responsible for any remaining errors or omissions.

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