The impact of economic policy uncertainty on the innovation in China: Empirical evidence from autoregressive distributed lag bounds tests

Abstract

This study is the first attempt to scrutinize the causal relationship between economic policy uncertainty (EPU) and innovation in the case of China, using the autoregressive distributed lag (ARDL) approach to co-integration approach of innovation accounting for causality analysis. The empirical findings show that EPU can negatively affect innovation. EPU indicates a significantly negative impact on innovation as well as on the gross domestic product (GDP) growth rate. The combined results based on ARDL, innovation accounting approach (IAA) (variance decompositions and impulse response functions), and fully modified ordinary least square (FMOLS) raise an important point that calls for attention. The point is relating to the causality running from EPU to innovation. The future of China is uncertain, so when the economic uncertainty is higher, it lowers the value of future activities of the economy of China.

Keywords:

• innovation
• economic policy uncertainty
• causality analysis

PUBLIC INTEREST STATEMENT

This study is the first attempt to scrutinize the casual relationship between EPU and innovation in the case of China. Economic reforms of China after late 1978 have taken five different economic development phases. It is widespread incomplete legal, government regulating rules and market rules are the main characteristics of Chinese market. The incomplete market economy and its disposable resources of China are under the control of government. China is a transitional economy; different firms have its political connections and relationship between executives of firms and local government officials, thus high political uncertainty leads to less investment. This study observed that the future of China is uncertain; as the economic uncertainty is higher it lowers the value of future economic activities.

Figure 3. Impulse response function (combined graph).

Notes

1. Estimation procedure in detail can be obtained from Hashem and Pesaran (1997).

2. Mostly economic literature is argued that the Granger-causality techniques such as “VECM Granger causality Test” have some limitations. The causality approach cannot show the relative strength of causal association between the variables beyond the given time period. This weak property of the reliability of causality resulted by the approach of VECM Granger (Wolde—Rufael, 2009).

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Hummera saleem

Hummera Saleem is, a Pakistani, doing PhD in Wuhan University department (China), school of economics and management. She won Higher Education Commission (HEC) scholarship for her PhD degree from China Republic. She focuses topics relating to economic growth and development and environmental degradation.

Wen Jiandong

Wen Jiandong is the honorable professor at school of economics and management in Wuhan University, China.

Muhammad Bilal Khan

Muhammad Bilal Khan is, a Pakistani, doing PhD in Wuhan University department (China), school of economics and management. The main area of interest is corporate finance and accounting.