Abstract
We use a narrative method to construct an uncertainty measure based on transnational geopolitical tensions that is plausibly uncorrelated with the existing economic conditions. Increases in geopolitical uncertainty cause a significant reduction in R&D expenditure and patenting activity – measured using patent numbers, citations, and private value – for a sample of publicly listed firms in the US. In the cross-section, the impact of geopolitical uncertainty on innovation and output growth is greater for firms in industries with high innovative competition and financial market frictions. We show that our results are unlikely to be driven by omitted variable bias or measurement error.
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