DP16611 Currency Volatility and Global Technological Innovation

Author(s): Po-Hsuan Hsu, Mark Taylor, Zigan Wang, Qi Xu
Publication Date: October 2021
Keyword(s): Foreign Exchange Volatility, patents, R&D, Technological innovation
JEL(s): F31, G32, O30
Programme Areas: Financial Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16611

We investigate the real effects of foreign exchange (FX) volatility on technological innovation. Using a 32-market, three-decade sample, we show that heightened FX volatility associates with significantly lower firm-level R&D expenditures, patents granted, and forward citations. The negative FX volatility-innovation relation can be attributed to precautionary savings needs and trade slowdown. The relationship is stronger for firms with financial constraints, with the use of foreign debt, and in more open economies; it is weaker for firms with derivatives hedging, with higher sales, and in countries with better financial development. We also use FX regime changes and the collapse of the European Exchange Rate Mechanism to support a causal interpretation