Unexpected Currency Volatility and Global Technological Innovation Activities

We investigate the real effects of foreign exchange (FX) uncertainty on an important economic growth engine-technological innovation. In a sample consisting of 55 countries, we measure FX uncertainty using the unexpected FX volatility and then show that heightened FX uncertainty is associated with significantly lower firm-level R&D expenditures, patents granted, and forward citations of these patents. This relationship is stronger for firms with FX exposure. On the other hand, firms' use of currency derivatives to hedge effectively mitigates the impact of FX uncertainty. We show that the negative FX uncertainty-innovation relationship can be attributed to two mechanisms: precautionary savings and economic openness. We further use the changes of FX regimes, sovereign debt downgrades, the collapse of the European Exchange Rate Mechanism (ERM), and the Russian sovereign debt default to strengthen a causal interpretation of our results