Policy Uncertainty, Technological Competition, and Competitive Dynamism

We examine how policy uncertainty affects firm innovation and competitive dynamism. In R&D races, the gap in the rate of innovation, rather than the absolute rate, determines the winner. As a result, periods of depressed innovation and investment from policy uncertainty present an opportune window for laggards to challenge and overtake leaders. We present evidence that policy uncertainty increases the rate of innovation by laggards relative to leaders and accelerates upward reversion in laggards' performance. When policy uncertainty is high, technological competition intensifies even as the overall level of innovation and investment declines. This study introduces competitive interactions as a novel microeconomic channel through which uncertainty affects investment and competitive dynamism beyond prior considerations of the real options effect