Does oil price uncertainty affect corporate innovation?

Abstract

This study examines the relation between oil price uncertainty (OPU) and corporate innovation productivity. Using firm-level innovation data of US firms, we find that OPU is negatively associated with future innovation outcomes, proxied by the number of patents and subsequent citations, and the dollar value of innovation. However, this negative relation is more pronounced for non-green innovation than for green innovation and predominantly driven by oil supply shocks. Our supply-side explanation suggests that since oil supply shocks induce uncertainty about future economic growth opportunities and cost of operation, firms tend to decrease their investment in innovation activities. This negative relation is pronounced more in manufacturing firms and firms located in non-oil-producing states, and the pre-financial crisis period. Further analysis suggests that increases in the cost of external financing and cash holdings appear to be the underlying mechanisms through which OPU impedes firm innovation. The results survive from several model specifications, alternative variable definitions, and controlling additional firm and macroeconomic factors. Overall, OPU seems to have an important implication in shaping firms' investment in innovation. Several implications are discussed.