Working Paper: CEPR ID: DP16611
Authors: Pohsuan Hsu; Mark P. Taylor; Zigan Wang; Qi Xu
Abstract: 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
Keywords: Foreign exchange volatility; Technological innovation; Patents; R&D
JEL Codes: F31; O30; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heightened FX volatility (F31) | lower firm-level R&D expenditures (D22) |
| heightened FX volatility (F31) | lower number of domestic patents (O34) |
| heightened FX volatility (F31) | lower domestic citations (A14) |
| heightened FX volatility (F31) | lower US patents (O34) |
| heightened FX volatility (F31) | lower US citations (A14) |
| heightened FX volatility (F31) | lower propensity to file a patent (O34) |
| heightened FX volatility (F31) | increase in cash holdings (G32) |
| heightened FX volatility and higher financial constraints (F65) | lower firm-level R&D expenditures (D22) |
| heightened FX volatility and less financial development (F65) | lower firm-level R&D expenditures (D22) |
| heightened FX volatility and use of currency derivatives (F31) | higher firm-level R&D expenditures (D25) |