Pablo Egaña Del Sol

How does expropriation risk affect innovation?

Jose Miguel Benavente, Claudio Bravo-Ortega, Pablo Egaña-delSol, and Bronwyn H. Hall

Abstract

Drawing from Romer’s (1990) model, we examine how expropriation risk, like corruption, reduces incentives for innovation. Our framework predicts that expropriation risk reduces R&D spending, human capital allocation in R&D, patent creation, technical progress, and economic growth by diminishing expected profits and patent devaluation. Using a LASSO Instrumental Variable approach with extensive data over two decades, we find robust evidence that expropriation risk negatively impacts innovation by reducing R&D expenditure, human capital in R&D, number of patents, scientific publications, and the Economic Complexity Index, which is our proxy for technical progress. These results underscore expropriation risk’s harmful impact on innovation and economic advancement at the national level.