Abstract
Scholars have identified that investing in research and development (R&D) capabilities enables firms to export more. Left underexplored is the question: Does the positive relationship between R&D and exports continue to hold during institutional transitions, which are fundamental and comprehensive changes introduced to the rules of the game? In the context of India’s market-oriented institutional transitions, the implementation of Foreign Exchange Management Act (FEMA) in the year 2000 provides a natural experiment that helps us examine this question. We find evidence that although FEMA enabled innovative firms to generate more exports relative to the prior constrained environment, the relationship between R&D and exports ceases during the post-FEMA period. Theoretically, we shed light on how uncertainties that arise due to institutional transitions drive firms towards short-term orientation, which prevents the firms to building R&D capabilities.
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