What Affects Innovation More: Policy or Policy Uncertainty?
58 Pages Posted: 18 Dec 2013 Last revised: 13 Aug 2017
Date Written: February 3, 2017
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. This is particularly true for more 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.
Keywords: Innovation, Policy uncertainty, Policy, Political party
JEL Classification: G18, G38, O31, D80, E66
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