Facing the Heat: Political Instability and Firm New Product Innovation in Sub-Saharan Africa
Sorin M. S. Krammer and Mario I. Kafouros
kHUB post date: December 23, 2022
Originally published: April 4, 2022 (PDMA JPIM • Vol 39 • Issue 5 • September 2022)
Read time: 30 minutes
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We examine how political instability (PI) affects firms' product innovation and the strategies that firms can employ in response to PI. We argue that while higher levels of PI influence firms' innovation negatively, greater international exposure (through foreign ownership and exporting) can help firms partly overcome this external challenge and innovate. We test these predictions using a dataset of 3000 manufacturing firms across 15 countries from Sub-Saharan Africa. The empirical results confirm a robust and negative effect of PI on firms' product innovation through several mechanisms. They also suggest that all firms in a country, regardless of ownership structure, are equally affected by PI. Finally, higher levels of exporting weaken the deleterious effects of PI on innovation for both domestic and foreign firms. Our study offers insights into the barriers of innovation in emerging economies and explicates why some firms are more innovative than others in politically unstable contexts.
Practitioner Points
- PI has a robust and negative effect on firms' product innovation, irrespective of proxies used to capture various dimensions of both PI and innovation.
- These effects appear to operate via multiple mechanisms such as regulatory stability, reliability of courts but also finance and corruption.
- All firms in a country, regardless of ownership structures, are similarly affected by PI.
- Higher levels of exporting provide an “escape route” for both foreign and domestic firms by mitigating the negative effects of PI on innovation.