Impact of Political Uncertainty on R&D Activities in the Private Sector

Impact of Political Uncertainty on R&D Activities in the Private Sector

Most governments attempt to support the innovative activities of the private sector through public projects. Ideally, the public projects can help firms innovate and improve social welfare. One arguable point might be whether the public projects substitute for or complement the Research and Development (R&D) spending in the private sector. In this research, we pay attention on that all public projects are directly under the control of the administration and that a change in the administration can cause uncertainty. To anticipate the exogenous effects of public projects, firms should take into account the fact that the promised public projects differ among political parties. Not surprisingly, firms might prefer a specific type of administration when they pursue R&D projects. That's because they believe that their R&D project can have an advantage under some type of administration. However, a future administration is not known. Here, uncertainty arises. Depending upon which party might take power, the expected payoffs for the firms can be reduced or be enhanced. At last, we are going to discuss how uncertainty can affect the R&D spending of firms in the race for innovation.