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Macroeconomic Instability and the Incentive to Innovate

This paper investigates the channels through which macroeconomic volatility prevents or hinders innovative investment undertakings financed by the domestic business sector. The analysis is based on a sample of 48 countries, representing all levels of development, and uses various measures of macroeconomic instability, such as political, real and monetary volatility. The results suggest a negative impact of macroeconomic instability on the share of R&D financed by the domestic business sector. These outcomes highlight the desirability of counter-cyclical policy interventions aiming to prevent the avoidance or abandonment of private R&D undertakings in unstable macroeconomic environments.