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Journal ArticleDOI

What Affects Innovation More: Policy or Policy Uncertainty?

01 Oct 2017-Journal of Financial and Quantitative Analysis (Cambridge University Press. The Journal's web site is located at http://journals.cambridge.org/action/displayJournal?jid=jfq)-Vol. 52, Iss: 5, pp 1869-1901
TL;DR: In this article, the authors examine for 43 countries whether it is policy or policy uncertainty that affects technological innovation more than patent-based proxies, and uncover the mechanism underlying the main result by showing that the number of patenting inventors decreases with policy uncertainty.
Abstract: 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.
Citations
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Posted Content
TL;DR: The authors empirically analyze the pricing of political uncertainty, guided by a theo- retical model of government policy choice, and test those predictions in an international sample of national elections and global summits, finding that political uncertainty is priced in the option market in ways predicted by the theory.
Abstract: We empirically analyze the pricing of political uncertainty, guided by a theo- retical model of government policy choice. After deriving the model’s predictions for option prices, we test those predictions in an international sample of national elections and global summits. We find that political uncertainty is priced in the option market in ways predicted by the theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the risk associated with political events, including not only price risk but also variance and tail risks. This protection is more valuable in a weaker economy as well as amid higher political uncertainty.Â

257 citations

Journal ArticleDOI
TL;DR: In this paper, the authors examine the impact of government economic policy uncertainty on corporate innovation and identify a cost-of-capital transmission channel and find that GEPU increases firms' cost of capital, which translates into lower innovation.
Abstract: We examine the impact of government economic policy uncertainty (GEPU) on corporate innovation and identify a cost-of-capital transmission channel. We find that GEPU increases firms’ cost of capital, which translates into lower innovation. As economic policy uncertainty rises, firms with more exposure to such uncertainty face a higher weighted average cost of capital and innovate less. Innovations of financially constrained firms and firms relying on external finance in a competitive environment are affected more. Our study provides novel evidence that higher economic policy uncertainty hinders innovation not only through the traditional investment irreversibility channel, but also through the cost-of-capital channel.

212 citations

Journal ArticleDOI
TL;DR: The importance of economic policy uncertainty in financial decisions is highlighted in this article, where the authors show the importance of measuring and tracking uncertainty by highlighting its influence on financial decisions and show the asymmetric policy responses of economic uncertainty.
Abstract: The significance of uncertainty in policies related to economic decisions is higher than ever before in today’s interconnected world. This study contributes to existing research by reviewing the literature on the impact of economic policy uncertainty on corporations and economies worldwide. We show the importance of measuring and tracking uncertainty by highlighting its influence on financial decisions. We examine the growing number of studies that use the economic policy uncertainty index (EPU) of Baker, Bloom, and Davis (2016) as a key factor in measuring uncertainty. We then review the impact of EPU on financial markets, macro and micro level, stock markets, corporate behavior, and risk management. Then, we document the asymmetric policy responses of economic uncertainty. Overall, policy uncertainty has a significant impact on firm financial policies as well as on consumer spending. Specifically, corporations act more conservatively during times of high uncertainty, thereby slowing investments in production and employment. In addition to the local effect of EPU, it spills over to other countries.

193 citations

Journal ArticleDOI
TL;DR: In this article, the authors provide a synthetic and evaluative monograph of academic papers that examine the drivers and financing sources of corporate innovation, and provide a survey of the top three finance journals that published a total of only five papers on corporate innovation from 2000 to 2008, the number of such papers published by these three journals skyrocketed to 56 from 2009 to the third quarter of 2017.
Abstract: Corporate innovation is an increasingly important topic that has attracted great attention from academic researchers in financial economics in recent years. Although the top three finance journals (i.e. the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies) together published a total of only five papers on corporate innovation from 2000 to 2008, the number of such papers published by these three journals skyrocketed to 56 from 2009 to the third quarter of 2017. The purpose of this survey is to provide a synthetic and evaluative monograph of academic papers that examine the drivers and financing sources of corporate innovation.

136 citations

Journal ArticleDOI
TL;DR: In this article, the authors examined the impact of economic policy uncertainty on manufacturing firms' carbon emission intensity, including the innovation channel, share of fossil fuels in the total energy consumption channel, and energy intensity channel.

133 citations

References
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Journal ArticleDOI
TL;DR: In this paper, the authors consider the relation between the exploration of new possibilities and the exploitation of old certainties in organizational learning and examine some complications in allocating resources between the two, particularly those introduced by the distribution of costs and benefits across time and space.
Abstract: This paper considers the relation between the exploration of new possibilities and the exploitation of old certainties in organizational learning. It examines some complications in allocating resources between the two, particularly those introduced by the distribution of costs and benefits across time and space, and the effects of ecological interaction. Two general situations involving the development and use of knowledge in organizations are modeled. The first is the case of mutual learning between members of an organization and an organizational code. The second is the case of learning and competitive advantage in competition for primacy. The paper develops an argument that adaptive processes, by refining exploitation more rapidly than exploration, are likely to become effective in the short run but self-destructive in the long run. The possibility that certain common organizational practices ameliorate that tendency is assessed.

16,377 citations

Journal ArticleDOI
TL;DR: In this article, the authors proposed a method to improve the performance of the system by using the information of the user's interaction with the system and the system itself, including the interaction between the two parties.
Abstract: В статье производится анализ агрегированной производственной функции, вводится аппарат, позволяющий различать движение вдоль такой функции от ее сдвигов. На основании сделанных в статье предположений делаются выводы о характере технического прогресса и технологических изменений. Существенное внимание уделяется вариантам применения концепции агрегированной производственной функции.

10,850 citations


"What Affects Innovation More: Polic..." refers background in this paper

  • ...seminal work of Solow (1957).(1) Although a growing literature has examined various empirical links between innovation and firm- or market-specific characteristics, rigorous empirical studies that explore how politics affects innovation...

    [...]

Journal ArticleDOI
TL;DR: In this article, the authors used indicators of trust and civic norms from the World Values Surveys for a sample of 29 market economies and found that membership in formal groups is not associated with trust or with improved economic performance.
Abstract: This paper presents evidence that "social capital" matters for measurable economic performance, using indicators of trust and civic norms from the World Values Surveys for a sample of 29 market economies. Memberships in formal groups—Putnam's measure of social capital—is not associated with trust or with improved economic performance. We find trust and civic norms are stronger in nations with higher and more equal incomes, with institutions that restrain predatory actions of chief executives, and with better-educated and ethnically homogeneous populations.

6,894 citations


"What Affects Innovation More: Polic..." refers background in this paper

  • ...Second, Knack and Keefer (1997) find that ethnically homogeneous countries possess greater “social capital” (i.e., trust and civic norms)....

    [...]

Journal ArticleDOI
TL;DR: This article showed that ethnic diversity helps explain cross-country differences in public policies and other economic indicators in Sub-Saharan Africa, and that high ethnic fragmentation explains a significant part of most of these characteristics.
Abstract: Explaining cross-country differences in growth rates requires not only an understanding of the link between growth and public policies, but also an understanding of why countries choose different public policies. This paper shows that ethnic diversity helps explain cross-country differences in public policies and other economic indicators. In the case of Sub-Saharan Africa, economic growth is associated with low schooling, political instability, underdeveloped financial systems, distorted foreign exchange markets, high government deficits, and insufficient infrastructure. Africa's high ethnic fragmentation explains a significant part of most of these characteristics.

5,648 citations


"What Affects Innovation More: Polic..." refers background in this paper

  • ...First, ethnic division likely increases political polarization and thereby impedes the formation of social consensus on economic policies (Easterly and Levine (1997)). Second, Knack and Keefer (1997) find that ethnically homogeneous countries possess greater “social capital” (i....

    [...]

  • ...First, ethnic division likely increases political polarization and thereby impedes the formation of social consensus on economic policies (Easterly and Levine (1997)). Second, Knack and Keefer (1997) find that ethnically homogeneous countries possess greater “social capital” (i.e., trust and civic norms). Third, Connor (1994) suggests that the real source of civil violence and rebellion is often ethnic nationalism....

    [...]

  • ...First, ethnic division likely increases political polarization and thereby impedes the formation of social consensus on economic policies (Easterly and Levine (1997))....

    [...]

  • ...First, ethnic division likely increases political polarization and thereby impedes the formation of social consensus on economic policies (Easterly and Levine (1997)). Second, Knack and Keefer (1997) find that ethnically homogeneous countries possess greater “social capital” (i.e., trust and civic norms). Third, Connor (1994) suggests that the real source of civil violence and rebellion is often ethnic nationalism. Finally, La Porta et al. (1999) and Radro i Miquel (2007) argue that in ethnically heterogeneous societies, it is common for the in-power ethnic group to adopt discriminative policies to maintain political dominance....

    [...]

Journal ArticleDOI
TL;DR: The authors investigated empirically the determinants of the quality of governments in a large cross-section of countries and found that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics or Muslims exhibit inferior government performance.
Abstract: We investigate empirically the determinants of the quality of governments in a large cross-section of countries. We assess government performance using measures of government intervention, public sector efficiency, public good provision, size of government, and political freedom. We find that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics or Muslims exhibit inferior government performance. We also find that the larger governments tend to be the better performing ones. The importance of (reasonably) exogenous historical factors in explaining the variation in government performance across countries sheds light on the economic, political, and cultural theories of institutions.

5,555 citations


"What Affects Innovation More: Polic..." refers background in this paper

  • ...Finally, La Porta et al. (1999) and Radro i Miquel (2007) argue that in ethnically heterogeneous societies, it is common for the in-power ethnic group to adopt discriminative policies to maintain political dominance....

    [...]