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How important are capital controls in shaping innovation activity?

Alexandros Bechlioulis, Claire Economidou, Dimitris Karamanis and Dimitrios Konstantios

Journal of International Money and Finance, 2023, vol. 131, issue C

Abstract: This paper studies the role of capital controls in shaping innovation activity through the finance of R&D investment. The paper offers insights into the real effects of financial sector on the economy. It first asks whether capital controls shape innovation activity, both from the input (R&D) and output (patents) side. Based on a large dataset that includes 53 developed and emerging countries over the period 1996–2016 and a fixed effects identification and appropriate instrumentation strategy, results support a robust inverse U-shaped relationship between capital controls and R&D. Capital restrictions can be beneficial for R&D investment till a certain point and thereafter have detrimental negative effects, particularly for patents. Second, it asks whether the composition of restrictions of individual assets in the aggregate capital control index matters. We find equity-based finance restrictions greatly shape innovation activity, whereas controls on credit (bank) and direct investment assets exert no effect.

Keywords: Innovation; R&D; Patents; Capital controls; Financial markets (search for similar items in EconPapers)
JEL-codes: C32 F38 G15 O30 O50 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.jimonfin.2022.102768

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