Seminarios Académicos

Abstract: Increasing tensions and conflicts among countries in recent years have led to a rise in geopolitical risk (GPR). Opinions and anecdotes suggest that the rising GPR may raise organizational uncertainty, which may curb firm-level innovation. This article empirically tests this suggestion. The authors report that an increase in GPR stifles innovation output, measured by the number and financial/scientific value of patents. Next, they provide evidence for the underlying mechanism of uncertainty using three variables. First, the GPR effect strengthens as the firm’s exposure to foreign product markets increases. Second, in response to rising GPR, the firm lowers its research-and-development investment, which in turn curbs its innovation output. Third, following a rise in GPR, fewer inventors join a firm than the number that leave it. This drop in inventor inward mobility hampers innovation output. The effect of GPR on innovation is robust to correction for endogeneity, alternate measures of innovation and GPR, and alternate specifications. The GPR effect is stronger for larger firms and firms in concentrated industries. Managers can mitigate the GPR effect by suppressing their firm’s lobbying and advertising in times of high GPR. Our results suggest that GPR has a significant impact on the real economy.