The nexus between economic policy uncertainty and innovation performance in Visegrad group countries

Abstract

Research background: Research and development (R&D) spending and innovation initiatives play a crucial role in promoting growth. However, economic policy uncertainty (EPU) is a reality that cannot be avoided when making business decisions. The Visegrad Group (V4), consisting of Poland, Hungary, the Czech Republic, and Slovakia, is considered a regional alliance of four Central European countries with significant potential for innovation and economic development because these nations’ economies are encountering the so-called ‘middle-income trap’.

Purpose of the article: The paper’s main objective is to examine the impact of economic policy uncertainty on innovation performance and R&D expenditures in the Visegrad Group countries. 

Methods: The study used comparative panel models analysis (fixed effect, random effect, and system generalized method of moments [GMM]) between 2012 and 2021. The models include the lag periods for EPU to provide a better perspective on the short-term impact and even long-term consequences of EPU.

Findings & value added: The directions of innovation output and R&D expenditures are directly related to EPU. In V4 economies, businesses may reduce their spending on R&D and innovation activities when confronted with high EPU; however, over time, the volatility of economic uncertainties is adjusted for. Additionally, the political and economic control variables increase the number of dimensions used in the models, which will motivate additional EPU studies in the field. Although EPU studies are widely accepted, our investigation shows that the topic is still not properly developed for Visegrad Group countries in relation to how EPU affects innovation activity. Another unique feature of the current study is the diversity of variables used, including the EPU lag variables, variables representing essential economic and political issues, as well as control variables, thus incorporating complex panel models.

Keywords

economic policy uncertainty (EPU), innovation, research and development (R&D) spending, system generalized method of moments (GMM), Visegrad Group countries

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