Geopolitical Risk and R&D investment

Wei-Fong Pan

No em-dp2019-11, Economics Discussion Papers from Department of Economics, University of Reading

Abstract: Although most empirical studies conclude that uncertainty delays firms' investments based on real options theory, empirical evidence regarding the impact of uncertainty on innovation is mixed. This study examines the impact of geopolitical risk (GPR) on corporate research and development (R&D) investment using newly developed indices. We find a negative relationship between GPR and R&D investment. The R&D investment rapidly drops and rebounds several quarters after high GPR. The impact of GPR is most significant for high-tech firms, small firms, and firms with high growth options. However, when GPRs are realised, these significant and negative effects disappear. These results are shown to be robust after controlling for firm characteristics, macroeconomic environment, other uncertainty measures, time, and alternative GPR and R&D measures, as well as considering the simultaneity and endogeneity issues. Overall, our study suggests that GPR plays a key role in determining R&D investment.

Keywords: R&D; Political uncertainty; Geopolitical risk; Innovation (search for similar items in EconPapers)
JEL-codes: D80 H56 O31 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2019-07-01
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-ino, nep-sbm and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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