IDEAS home Printed from https://ideas.repec.org/p/bwu/eiiwdp/disbei218.html
   My bibliography  Save this paper

Currency Overvaluation and R&D Spending

Author

Listed:
  • Arthur Korus

    (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))

Abstract

This paper investigates the impact of an overvalued currency on R&D spending in manufacturing sectors. In particular, we explore whether a real overvaluation against the US Dollar affects R&D investments in manufacturing sectors of OECD countries. So far the literature has elaborated on either the impact of exchange rate swings on R&D investment or the effect of exchange rate volatility on R&D spending. Thus, to the author's best knowledge, this study is the first which investigates the relationship between real overvaluation and R&D spending. In this paper, we test empirically whether real overvaluation against the US dollar has a direct effect as well as an indirect effect via export activity on R&D investment by using OECD panel data of the manufacturing sectors of 16 OECD countries. We find that real overvaluation against the US dollar both directly and indirectly affects R&D intensities in manufacturing sectors. Furthermore, we have evidence that real overvaluation against the US Dollar caused by monetary policy and financial factors negatively affects R&D intensities in manufacturing sectors.

Suggested Citation

  • Arthur Korus, 2016. "Currency Overvaluation and R&D Spending," EIIW Discussion paper disbei218, Universitätsbibliothek Wuppertal, University Library.
    • Handle: RePEc:bwu:eiiwdp:disbei218
    as

    Download full text from publisher

    File URL: https://eiiw.wiwi.uni-wuppertal.de/fileadmin/eiiw/Daten/Publikationen/Gelbe_Reihe/disbei218.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2014. "Importers, Exporters, and Exchange Rate Disconnect," American Economic Review, American Economic Association, vol. 104(7), pages 1942-1978, July.
    2. Campa, Jose Manuel & Goldberg, Linda S, 1999. "Investment, Pass-Through, and Exchange Rates: A Cross-Country Comparison," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 287-314, May.
    3. Jose Manuel Campa & Linda S. Goldberg, 2001. "Employment Versus Wage Adjustment And The U.S. Dollar," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 477-489, August.
    4. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    5. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 437-492.
    6. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    7. Zietz, Joachim & Fayissa, Bichaka, 1994. "The impact of exchange rate changes on investment in research and development," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(2), pages 195-211.
    8. repec:bla:ecorec:v:70:y:1994:i:209:p:149-61 is not listed on IDEAS
    9. Boris Kaiser & Michael Siegenthaler, 2016. "The Skill‐biased Effects of Exchange Rate Fluctuations," Economic Journal, Royal Economic Society, vol. 0(592), pages 756-780, May.
    10. Yi Lu & Travis Ng, 2013. "Import Competition and Skill Content in U.S. Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1404-1417, October.
    11. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72(6), pages 584-584.
    12. Konrad Adler & Christian Grisse, 2014. "Real exchange rates and fundamentals: robustness across alternative model specifications," Working Papers 2014-07, Swiss National Bank.
    13. Mark Funk, 2003. "The Effects of Trade on Research and Development," Open Economies Review, Springer, vol. 14(1), pages 29-42, January.
    14. Ahn JaeBin & Park Chang-Gui & Park Chanho, 2017. "Pass-through of imported input prices to domestic producer prices: evidence from sector-level data," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(2), pages 1-14, June.
    15. Bettina Becker & Stephen Hall, 2009. "Foreign Direct Investment in R&D and Exchange Rate Uncertainty," Open Economies Review, Springer, vol. 20(2), pages 207-223, April.
    16. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
    17. Zoltan J. Acs & David B. Audretsch, 2008. "Innovation, Market Structure, and Firm Size," Chapters, in: Entrepreneurship, Growth and Public Policy, chapter 2, pages 16-23, Edward Elgar Publishing.
    18. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
    19. Landon, Stuart & Smith, Constance E., 2009. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 813-835, September.
    20. Chang-Yang Lee, 2002. "Industry R&D intensity distributions: regularities and underlying determinants," Journal of Evolutionary Economics, Springer, vol. 12(3), pages 307-341.
    21. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    22. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688, Elsevier.
    23. Prashanth Mahagaonkar & Rainer Schweickert & Aditya S. Chavali, 2009. "Sectoral R&D intensity and Exchange Rate Volatility: A Panel Study on Economies of the OECD," Jena Economics Research Papers 2009-056, Friedrich-Schiller-University Jena.
    24. Howard J. Shatz & David G. Tarr, 2017. "Exchange Rate Overvaluation and Trade Protection: Lessons from Experience," World Scientific Book Chapters, in: Trade Policies for Development and Transition, chapter 5, pages 115-127, World Scientific Publishing Co. Pte. Ltd..
    25. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, April.
    26. Jerome L. Stein, 2001. "The Equilibrium Value of the Euro/$ US Exchange Rate: An Evaluation of Research," CESifo Working Paper Series 525, CESifo.
    27. Mr. Jack J Ree & Mr. Gee Hee Hong & Seoeun Choi, 2015. "Should Korea Worry about a Permanently Weak Yen?," IMF Working Papers 2015/158, International Monetary Fund.
    28. Bettina Becker, 2013. "The Determinants of R&D Investment: A Survey of the Empirical Research," Discussion Paper Series 2013_09, Department of Economics, Loughborough University, revised Sep 2013.
    29. Bergstrand, Jeffrey H, 1991. "Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 81(1), pages 325-334, March.
    30. Dimos, Christos & Pugh, Geoff, 2016. "The effectiveness of R&D subsidies: A meta-regression analysis of the evaluation literature," Research Policy, Elsevier, vol. 45(4), pages 797-815.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Fidora & Claire Giordano & Martin Schmitz, 2021. "Real Exchange Rate Misalignments in the Euro Area," Open Economies Review, Springer, vol. 32(1), pages 71-107, February.
    2. Mahagaonkar, Prashanth & Schweickert, Rainer & Chavali, Aditya S., 2009. "Sectoral R&D intensity and exchange rate volatility: a panel study for OECD countries," Kiel Working Papers 1531, Kiel Institute for the World Economy (IfW Kiel).
    3. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.
    4. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    5. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, October –.
    6. Égert, Balázs, 2004. "Assessing equilibrium exchange rates in CEE acceding countries: can we have DEER with BEER without FEER? A critical survey of the literature," BOFIT Discussion Papers 1/2004, Bank of Finland Institute for Emerging Economies (BOFIT).
    7. repec:onb:oenbwp:y::i:106:b:1 is not listed on IDEAS
    8. Vikas Kakkar, 2003. "The Relative Price of Nontraded Goods and Sectoral Total Factor Productivity: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 444-452, May.
    9. Saleh S. Tabrizy, 2020. "Industrial research and development and real exchange rate depreciation in a small open economy," The World Economy, Wiley Blackwell, vol. 43(9), pages 2490-2523, September.
    10. Rapach, David E. & Wohar, Mark E., 2004. "Testing the monetary model of exchange rate determination: a closer look at panels," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 867-895, October.
    11. Égert, Balázs, 2004. "Assessing equilibrium exchange rates in CEE acceding countries: can we have DEER with BEER without FEER? A critical survey of the literature," BOFIT Discussion Papers 1/2004, Bank of Finland Institute for Emerging Economies (BOFIT).
    12. Ha, Jongrim & Marc Stocker, M. & Yilmazkuday, Hakan, 2020. "Inflation and exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 105(C).
    13. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, November.
    14. Robert J. Sonora & Josip Tica, 2014. "Harrod, Balassa, and Samuelson (re)visit Eastern Europe," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-17, December.
    15. Jenkins, Michael A. & Snaith, Sean M., 2005. "Tests of Purchasing Power Parity via cointegration analysis of heterogeneous panels with consumer price indices," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 345-362, June.
    16. Luca Antonio Ricci & Gian Maria Milesi-Ferretti & Jaewoo Lee, 2013. "Real Exchange Rates and Fundamentals: A Cross-Country Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 845-865, August.
    17. Hu, Cui & Parsley, David & Tan, Yong, 2021. "Exchange rate induced export quality upgrading: A firm-level perspective," Economic Modelling, Elsevier, vol. 98(C), pages 336-348.
    18. Farid Makhlouf & Mazhar Mughal, 2013. "Remittances, Dutch Disease, And Competitiveness: A Bayesian Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 67-97, June.
    19. Stephan Schulmeister, 2000. "Kaufkraftparitäten des Dollars und des Euro," WIFO Monatsberichte (monthly reports), WIFO, vol. 73(8), pages 487-500, August.
    20. Mark, Nelson C. & Choi, Doo-Yull, 1997. "Real exchange-rate prediction over long horizons," Journal of International Economics, Elsevier, vol. 43(1-2), pages 29-60, August.
    21. Broda, Christian, 2006. "Exchange rate regimes and national price levels," Journal of International Economics, Elsevier, vol. 70(1), pages 52-81, September.

    More about this item

    Keywords

    Real Exchange Rate; Equilibrium Real Exchange Rate; Overvaluation; R&D Intensity; Innovation; OECD countries;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bwu:eiiwdp:disbei218. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Frank Hoffmann (email available below). General contact details of provider: http://elpub.bib.uni-wuppertal.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.