Does foreign exchange derivatives market promote R&D? International industry-level evidence

Efficient financial markets can motivate and nurture innovation. The foreign exchange derivatives (FXD) market, an important part of financial markets, provides instruments to hedge profits from currency fluctuations. However, whether and how FXD market development benefits innovation remains unclear. Using data from a sample of 45 developed and emerging economies, this paper is among the first to examine the impact of the development of the FXD market on industry-level research and development (R&D) investment. We find that a better-developed FXD market significantly enhances industry-level R&D investment, especially in emerging economies. When the average daily FXD turnover that measures FXD market development increases by one standard deviation, industry-level R&D expenses increase by 27% in the following year. This effect is more significant for industries with higher foreign exchange rate risk. Policymakers should consider the benefits of developing the FXD market to the real economy when optimising FXD regulations.