12.12.2018

The Influence of Politics on Innovation

BHATTACHARYA, Utpal | HSU, Po-Hsuan | TIAN, Xuan | XU, Yan

Technological innovation plays a key role in promoting a nation’s long-term economic growth and competitive advantage. When it comes to innovation, politics is an important factor to consider, as politicians have the ability to implement policy or regulatory changes that can affect a nation’s innovation incentives.

To examine the effects of politics on innovation, a study by Utpal Bhattacharya, Po-Hsuan Hsu, Xuan Tian, and Yan Xu used predictions from a theoretical framework to test whether policy and policy uncertainty affected a country’s innovation, and if so, which of the two affected innovation to a larger degree.

In their study, patent data was gathered in order to capture innovation activities by determining the number of patents generated by a particular nation. The distribution of citations for these patents were also used to show the quality of innovation. Based on these citations, the researchers were also able to calculate the originality of the patents.

The authors hypothesised that government policy is an important aspect of innovation. In addition, their “policy uncertainty hypothesis”, argued that policy uncertainty adversely affected innovation. The question is, which has a more significant impact on innovation, policy or policy uncertainty? Based on their theoretical model, it was found that “policy uncertainty is more important than policy in countries where a political party does not dominate in the realm of efficiency in promoting innovation, and vice versa”.

To empirically test their hypothesis, the researchers used the national elections of 43 countries to determine whether policy or policy uncertainty affected technological innovation more. For this study, data regarding U.S. patents and their inventors were collected. Furthermore, the annual level of total research and development expenses of all publicly-listed firms in the Worldscope database was used as an additional way of showing innovation levels.

One empirical challenge was the ability to capture the policy uncertainty of the selected nations. To overcome this issue, the researchers used national elections; the authors explained, “because election outcomes are relevant to all aspects of policies such as fiscal, monetary, trade, social security, industry regulation and taxation, national elections are a reasonable proxy for overall policy uncertainty”.

Their empirical findings supported the logic of their theoretical model, in that individuals’ incentives to innovate is negatively affected by policy uncertainty, which as a result leads to fewer inventions. Moreover, the authors found that policy uncertainty adversely affects innovation in the most innovation-intensive industries. They also discovered that policy uncertainty negatively affects research and development spending.

Overall, their study showed that policy, on average, does not affect a country’s innovation activities. However, policy uncertainty was found to adversely affect a county’s innovation quantity, quality, originality, and riskiness. As such, the type of policy that prevails in most democracies does not have an impact on innovation. “What matters is political gridlock and the resultant political uncertainty, because they have real adverse economic consequences”, the authors said.

BHATTACHARYA, Utpal

Chair Professor, Executive Editor, Financial Management
Finance