Innovation, market valuations, policy uncertainty and trade: Theory and evidence

This dissertation presents the theoretic and empirical findings on innovation, market returns, and trade, with particular focuses on how a firm's innovation activities affect their market returns through the channel of productivity-improving, and how policy uncertainty affects a firm's trading and innovation decisions.Chapter 2 examines the relationship between productivity and innovation, using the U.S. manufacturers' patent data from 1976-2006. First, this chapter investigates whether productive firms actively participate in innovation in terms of having more patents, and then examines whether their innovation activities are involved in a wide spectrum of technological categories. The empirical results reveal that: (i) productivity is positively correlated with the number of patents granted and the number of technological categories for these patents; and (ii) productivity is positively correlated with the number of citations per granted patent and is also positively correlated with the number of technological categories for cited patents per granted patent.Chapter 3 examines the impact of innovation on a firm's operating performance, market valuation, and stock returns, especially the role of Innovation Efficiency in predicting a firm's future market valuation. Three different measures of Innovation Efficiency--the number of granted patents per patent or citation (backward and forward) technological fields scaled by research and development expenditures--are proposed, which combine the breadth of knowledge used to innovate and R\&D investments. The empirical results show that: (i) firm's market valuation and excess returns increases are largely driven by the changing valuation of Innovation Efficiency, while innovation quantity, measured by patent intensity and R\&D intensity, has a strong and significant negative effect; (ii) the positive effect of Innovation Efficiency became larger over time from 1950 to 2010 and for high-technology industries; (iii) high efficient innovation firms are able to achieve higher and more persistent profitability and better operating performance through the effect of productivity.Chapter 4 introduces a dynamic general equilibrium growth model with policy uncertainty where policy uncertainty endogenously affects the dynamics of technical change, market leadership, firm entry and exit selection, and trade flows, in a world with two large open economies at different stages of development. The theoretical investigation illustrates that increase in policy uncertainty has a significant negative effect on exports and imports, but has ambiguous effects on innovation and welfare, while dynamically, trade liberalization boosts domestic innovation through induced international competition. In the empirical portion, this chapter studies how policy uncertainty affects innovation and firm decisions to enter into and exit from export markets by estimating the impact of trade policy uncertainty on patents applied by Chines manufacturing firms, as well as firm's entry and exit. Using Chinese patent applications and Chinese customs transactions between 2000-2006, this chapter exploits time-variation in product-level trade policy and the empirical results show that: (i) Chinese firms have less incentive in innovation activities when facing increased trade policy uncertainty; (ii) Chinese firms are less likely to enter new foreign markets when their products are subject to increased trade policy uncertainty; (iii) Chinese firms are more likely to exit from established foreign markets when policy uncertainty increases.