Currency Volatility and Global Technological Innovation

70 Pages Posted: 9 Nov 2021

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR); Brookings Institution

Zigan Wang

The University of Hong Kong

Qi Xu

Zhejiang University - School of Economics and Academy of Financial Research

Date Written: October 2021

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, patents, R&D, Technological innovation

JEL Classification: F31, G32, O30

Suggested Citation

Hsu, Po-Hsuan and Taylor, Mark P. and Wang, Zigan and Xu, Qi, Currency Volatility and Global Technological Innovation (October 2021). CEPR Discussion Paper No. DP16611, Available at SSRN: https://ssrn.com/abstract=3960192

Po-Hsuan Hsu (Contact Author)

National Tsing Hua University ( email )

No. 101, Section 2, Guangfu Road, East District
Hsin Chu 3, 300
China

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Zigan Wang

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Qi Xu

Zhejiang University - School of Economics and Academy of Financial Research

Yuquan Campus 38 Zheda Road
Hangzhou, Zhejiang 310027
China

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