Overseas institutional uncertainty and corporate innovation – evidence from an emerging economy

Abstract

Using the 2016 US presidential election as a source of plausibly exogenous variation in uncertainty, we examine the R&D effect of institutional uncertainty in Chinese listed firms. Our results show that innovation activities are adversely affected in firms exposed to external election shocks and that the effect is more pronounced in SOEs, older firms, and financially constrained firms. Our study contributes to the literature on uncertainty and R&D management by broadening the conceptual boundaries of institutional uncertainty and enriching the understanding of how overseas institutional uncertainty affects domestic firms' R&D activities. The findings have important implications for innovation strategy at firms and policymaking at governments.