Uncertainty Stifles Innovation and Growth: Evidence From Geopolitical Flare-Ups

Abstract

Using an indicator measure based on war and terror acts that is plausibly uncorrelated with local economic conditions, we document that unanticipated increases in geopolitical uncertainty cause a reduction in R&D expenditure and patenting activity in firms in the U.S. In the cross section, the impact of geopolitical uncertainty on innovation is greater for firms in industries with high innovative competition and financial market frictions. Using industry level data, we show that geopolitical uncertainty lowers long-run economic growth through each of the mechanisms. We show that our results are unlikely to be driven by omitted variable bias or measurement error.