Foreign Exchange Exposure and Corporate Innovation: Evidence from China’s A-Share Listed Firms

Abstract

With exchange rate volatility becoming increasingly pronounced, managing currency exposure has become a central component of corporate decision-making. This paper investigates the link between foreign exchange (FX) uncertainty and technological advancement, using data from Chinese A-share listed firms (2013–2023). We find that higher FX exposure is associated with significantly lower patent output. This negative relationship remains robust to alternative variable definitions, alternative rolling-window lengths and lag specifications, and instrumental variable (IV) approaches. Mechanism tests reveal that financial constraints serve as an important transmission channel: FX volatility elevates the external finance premium and reduces internal liquidity, thereby crowding out R&D investments. Cross-sectional analyses indicate that this crowding-out effect is more pronounced among non-state-owned enterprises (non-SOEs) and firms with foreign revenue exposure. Our findings provide empirical evidence on the real effects of macroeconomic FX shocks and offer implications for FX expectation management and structural monetary policies.