R&D as a Source of the Resilience for Exporting Firms in the Face of Large Exchange Rate Movements

The Canadian dollar has experienced large movements in value against the U.S. dollar and other major currencies, thus creating significant strategic challenges for Canadian exporters. More specifically, when the Canadian dollar is devalued, exporters may depend on low export costs as their source of competitive advantage. However, when the value of the Canadian dollar is appreciated, innovation and product quality are more important to justify higher costs to foreign importers. Firm-level R&D investments enable the development of innovative and distinctive products, which improves exporters’ ability to compete in global markets in the face of an appreciated currency and serves as a source of resilience for exporters in the face of unfavourable exchange rate movements. Using Canadian microdata on firms operating within Canadian goods-producing industries over 2005 to 2019, this article provides evidence in support of these hypotheses.