Economic policy uncertainty and industry innovation: Cross country evidence

Abstract

We use the fixed effects identification strategy to examine the impact of economic policy uncertainty on innovation using cross-country industry data and how country institutions moderate this relationship. Our findings show that economic policy uncertainty impedes innovation across all five innovation proxy measures; patent counts, patenting entities, citations per patent, patent originality, and patent generality. Our study uncovers three economic mechanisms that potentially explain the negative relationship between economic policy uncertainty and technological innovation. We show that patent counts, patenting entities, patent citations, patent originality, and patent generality fall following high economic policy uncertainty episodes via the risk-tolerance, financial, and information channels. We also provide evidence that the adverse effects of economic policy uncertainty on innovation are moderate in countries with higher levels of transparency, more liberalized financial markets and higher property and patent rights protection. Our paper provides evidence on the real effects of economic policy uncertainty shocks on the economy.