Safety Uncertainty and Corporate Innovation—Evidence from Terrorist Attacks

Abstract

This paper examines the impact of safety uncertainty on corporate innovation in China. Taking terrorist attacks as an exogenous shock to safety uncertainty, we employ a difference-in-difference approach to establish causality. Specifically, we find that firms located nearby terrorist attacks generate poor innovation outcomes as measured by patents and citations. The impact of safety uncertainty is more significant when the firm is non-SOE, in regions with high crime rate, and in regions with stricter internet censorship. Furthermore, we show that R&D investment and inventor mobility are two plausible channels underlying our findings. In particular, safety uncertainty arising from terrorism drives firms to cut R&D investment and lose valuable inventors, which hampers corporate innovation.