Currency volatility and global technological innovation

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. •Firms with higher foreign exchange volatility hold more cash and produce fewer patents and patents with fewer citations.•We use a Bartik-style instrument and two major historical shocks to identify the effect of FX volatility.•The negative relation can be attributed to firms’ precautionary savings needs and overall trade slowdown.•The negative relation is stronger for firms with financial constraints, with smaller size, with the use of foreign debt, and in more open economies.•The negative relation is weaker for firms with derivatives hedging, and in countries with better financial development.