Federica Coelli, UiO
Department seminar. Federica Coelli is a researcher at UiO . She will present a paper entitled "Trade policy uncertainty and innovation: evidence from China".
I study the effect of policy uncertainty on innovation. To establish causality, I exploit a change in US trade policy towards China, the conferral of Permanent Normal Trade Relations (PNTR), which eliminated a major source of trade policy uncertainty. I combine two key insights from the trade and the real option literature: market size matters for innovation; uncertainty generates an option value of waiting which delays investment. I show that the role played by trade policy uncertainty is complementary to the role played by the level of protection, and provide evidence of an additional source of dynamic gains from trade. I test this mechanism by studying the response of Chinese industries to the transition from annual to Permanent Normal Trade Relations. The difference between ex-ante-established worst-case scenario and actually applied tariffs generates heterogeneous exposure to uncertainty. Using a triple difference-in-differences, I find that reducing policy uncertainty increases innovation in highly exposed industries. Increased export revenues drive the result, suggesting that reducing trade policy uncertainty induced firms to both export and invest in new technologies.