The bright side of being uncertain: the impact of economic policy uncertainty on corporate innovation

Abstract

Purpose This study aims to theoretically hypothesize and empirically examine the impact of economic policy uncertainty (EPU) on firms' innovation performance as well as the contingency conditions of this relationship. Design/methodology/approach This study collects and combines secondary longitudinal data from multiple sources to test for a direct impact of EPU on firms' innovation performance. It further examines the moderating effects of firms' operational and marketing capabilities. A series of robustness checks are performed to ensure the consistency of the findings. Findings In contrast to the common belief that EPU reduces the innovativeness of firms, the authors find an inverted-U relationship between EPU and innovation performance, indicating that a moderate level of EPU actually promotes innovation. Further analysis suggests that firms' operational and marketing capabilities make the inverted-U relationship steeper, further enhancing firms' innovation performance at a moderate level of EPU. Originality/value This study adds to the emerging literature that investigates the operational implications of EPU, which enhances our understanding of the potential bright side of EPU and broadens the scope of operational risk management.