6. Political Uncertainty

This chapter delves into the intricate relationship between political uncertainty and firms' investment and innovation decisions, with a particular emphasis on the impact of local political turnover in China. The study reveals that political uncertainty, such as changes in local leadership, significantly affects firms' incentives to innovate, leading to a temporary decline in innovative outcomes. The analysis highlights that cities with higher government expenditure or intellectual property rights trials, as well as smaller firms, experience a more pronounced reduction in innovation during political turnover. Furthermore, the research demonstrates that political uncertainty hampers research and development investment, government subsidies, and expansion decisions, ultimately resulting in smaller innovative outcomes. The findings contribute to the existing literature by examining the 'politics-economic outcomes' theory in a developing country context and providing a new explanation for the slowdown in innovation in China. The study concludes that the negative effects of political turnover on innovation are temporary and can be recovered once the uncertainty is resolved, shedding light on the future economic transition in China.