Identifying the impact of financial sanctions on innovation of target countries

Financial sanctions have become an increasingly prevalent tool in international relations, particularly since World War II. However, one critical area that remains underexplored is the impact of financial sanctions on the technological innovation capabilities of target countries. Our main finding is that financial sanctions reduce the overall number of patent and trademark applications in target countries. The channel analysis provides suggestive evidence that this adverse effect is consistent with disruptions to international trade and international capital flows, which may limit access to the external knowledge, technology, and capital needed for innovation. We also discover that the negative association between financial sanctions and innovation is weaker in countries with greater financial openness, deeper financial development, and stronger investment facilitation. These findings highlight policy conditions that may help target countries sustain innovation under financial sanctions.