Facing the heat: Political instability and firm new product innovation in sub-Saharan Africa

Abstract

We examine how political instability (PI) affects firms' product innovation and the strategies that firms can employ in response to PI. We argue that while higher levels of PI influence firms' innovation negatively, greater international exposure (through foreign ownership and exporting) can help firms partly overcome this external challenge and innovate. We test these predictions using a dataset of 3000 manufacturing firms across 15 countries from Sub-Saharan Africa. The empirical results confirm a robust and negative effect of PI on firms' product innovation through several mechanisms. They also suggest that all firms in a country, regardless of ownership structure, are equally affected by PI. Finally, higher levels of exporting weaken the deleterious effects of PI on innovation for both domestic and foreign firms. Our study offers insights into the barriers of innovation in emerging economies and explicates why some firms are more innovative than others in politically unstable contexts.