Economic policy uncertainty and investment efficiency during political chaos? The role of R&D investment

Purpose Pakistan has consistently faced challenges during political transitions and has endured continued political instability. This study aims to investigate the association between economic policy uncertainty (EPU) on investment efficiency during political instability and economic volatility. Design/methodology/approach This study utilizes panel data from listed firms in Pakistan from 2015 to 2023 to examine the impact of EPU on investment efficiency. The analysis further explores the moderating role of R&D investment in mitigating the adverse effects of EPU. Findings The results show that higher EPU is associated with lower investment efficiency (i.e. increased inefficiency), with political instability amplifying the issue. However, firms investing in R&D, those with government connections (civil and military) and those with foreign ownership demonstrate greater resilience in navigating uncertainty and sustaining efficient investment decisions. Practical implications The study offers valuable recommendations for the government to design targeted regulations to support firms, particularly those without strong institutional connections. Policymakers must prioritize a stable and predictable economic environment by addressing political instability and creating a transparent policy framework. Originality/value This study provides a comprehensive examination of the relationship between EPU and investment efficiency in Pakistan, specifically during heightened political instability. It provides new insight into how uncertainty affects firm-level investment behavior, including the influence of key political events.