Abstract

We explore the effect of political uncertainty on innovation. In particular, we examine the differential effects of two sources of uncertainty - leaders' education levels and political regimes (i.e., presidential vs. parliamentary) - on patent applications. We posit that firms react to political uncertainty caused by the unexpected departure of a national leader by investing in patents as growth options. The empirical design analyzes a panel with information from over 62 million patent applications at the aggregated applicant level. Results show that leaders' unexpected departures cause, on average, increases of approximately 9% in the aggregate growth of patent applications. We also find that the leader's level of education and the country's political regime system have significant effects on the relationship between political uncertainty and innovation. The difference between leaders with high and low levels of education accounts for 21% of the change in the growth of patent applications. Further, the effect of political uncertainty on innovation is amplified in presidential systems, which grant leaders more power and make electoral transitions less predictable. The differences between presidential and parliamentary systems account for approximately 16% of the change in the growth of patent applications. As a robustness check, we utilized a subsample of more than 170,000 firms with local and foreign patent applications, as well as a panel of over 5700 government non-profits, universities, and hospitals with local patent applications. Consistent with our theory, the former react to political uncertainty by investing in patents, while the latter remain unaffected. We contribute by showing the theoretical mechanisms linking leader and regime characteristics with patent applications.