R&D plans, expectations, and uncertainty: Evidence from the COVID-19 shock in Italy.

This paper takes advantage of the COVID-19 outbreak to explore the determinants of firms' R&D choices around an exogenous shock. We make use of unique panel data on 7,800 Italian companies between January –right before the pandemic– and March 2020 –amid lockdown policies. We exploit the short-run revision in firms' research plans to test the impact of deteriorating expectations and uncertainty on firms' R&D. In addition to the significant role played by firms' expectations, we find that preexisting innovative activities significantly shaped the reaction to the general uncertainty shock. • We explore the determinants of firms R&D choices around an exogenous shock. • We test the differential effect of deteriorating expectations and uncertainty on firms' R&D. • Expectations on future demand have a dramatic effect, especially for innovative companies. • Characteristics of the innovative process shape firms' reaction to the general uncertainty. • Newly innovative and transitioning companies are particularly affected. [ABSTRACT FROM AUTHOR]