Devaluation, innovation, and prices

Sanjay Paul, Elizabethtown College


We investigate the effects of exchange rate changes on innovation by a multinational corporation. The firm enjoys a monopoly in the home market but engages in Cournot competition with a domestic firm in the foreign market. Changes in currency values affect the multinational firms profits in domestic currency units, and thus influence the optimal level of process innovation as well as output and prices in the two markets. We find that a devaluation of the home currency will lead the home firm to increase its output in both the home and foreign markets, and increase its spending on R & D. We also find that currency devaluation in the home market leads to lower prices in both markets.