Research from the University of Nebraska–Lincoln College of Business suggests that political uncertainty, often seen as a hindrance to economic stability, may actually have a silver lining. The study reveals that companies tend to increase investment in research and development when political uncertainty is high, particularly during closely contested gubernatorial elections.
In the paper, "The Bright Side of Political Uncertainty: The Case of R&D," published in the Review of Financial Studies, Julian Atanassov, associate professor of finance, found that firms see R&D as a strategic growth option in uncertain times.
“This is because R&D functions as a growth option, allowing firms to explore potential future opportunities. If they increase investment when the uncertainty is higher, they have the option to invest more in the future, if there is a favorable resolution,” Atanassov said. “If they do not invest, they will reduce their growth opportunities and lag behind their competitors in the future.”
This finding contrasts with previous research that predominantly focuses on the negative impact of political uncertainty on capital expenditures, mergers and acquisitions, initial public offerings and other corporate decisions.
“R&D is considered as one of the most important contributors to long-term economic growth. Therefore, by influencing R&D investment, political uncertainty has a surprising impact on growth and development,” Atanassov said.
Understanding the link between political uncertainty and R&D
To quantify political uncertainty, the researchers analyzed gubernatorial elections with narrow victory margins of less than 5%.
“The advantage of using gubernatorial elections is that they are outside of the control of the individual firm because gubernatorial elections occur every four years, and the year of elections cannot be changed by the firms,” Atanassov said. “That allows us to make a causal statement that political uncertainty influences R&D investment and not just document correlations.”
Atanassov illustrated the reasoning with an example: A firm considering an initial R&D investment in solar panels faces an uncertain future due to differing policy stances of two gubernatorial candidates—one who opposes incentives for green technology and one who supports them.
“The value of an initial $9 million R&D investment in a stable environment would have the Black-Scholes value of $7.26 million, which wouldn’t be worthwhile," Atanassov said. "However, if political uncertainty increases—such as during an election that could change environmental policy—the Black-Scholes value of the R&D opportunity rises to $11.23 million, making it a profitable move.”
Implications for businesses and policymakers
Atanassov and co-authors Brandon Julio at the University of Oregon and Tiecheng Leng at the Harbin Institute of Technology in China, highlight that businesses in politically sensitive and high-tech industries are the most likely to increase R&D spending during uncertain times. Instead of freezing investments, they leverage uncertainty to prepare for multiple future scenarios.
“This research has important implications for corporate managers, politicians, and policymakers. Our conclusion is that if investment is sometimes positively correlated with uncertainty, policymakers have less reason to be concerned. Warnings that policymakers should reduce lengthy policy debates and political uncertainty because of their negative effects should be made with caution and only after considering all types of investment,” Atanassov said.
By viewing uncertainty not just as a risk but as an opportunity, businesses can use it as a catalyst for innovation, ensuring they remain competitive regardless of the political climate.
