We use close gubernatorial elections as a quasi-natural experiment to document a positive effect of political uncertainty on firm-level R&D. This finding is in contrast to the existing literature documenting a negative impact of political uncertainty on capital investment. We examine potential mechanisms and find that our results are consistent with the growth option view of R&D investment. The effect is stronger for politically sensitive and high-tech industries.The results are robust to different proxies for political uncertainty shocks. As predicted by models of investment under uncertainty, the real effects of political uncertainty critically depend on the type of the investment.

 

In contrast to previous research documenting negative effects of political and policy uncertainty, we show that uncertainty has a bright side. It motivates companies to increase their investment in research in development. This is due to the growth option effect - investing in more R&D now gives firms the option to invest even more in the future if the uncertainty resolution is favorable. Additional results support our conjecture. We find that firms that are more politically sensitive and operate in high-tech industries are more likely to benefit from this growth option effect.