The Dark Side of the Boom: The Impact of Foreign Competition on R&D and Technology Upgrading

Abstract

The natural resource boom of the 2000s spurred growth in income and consumption in commodity-exporting nations. However, this paper brings together a previously unused combination of data sets from Colombia to document evidence of a downside -- the currency appreciation associated with this boom led to a significant decline in R&D and technological upgrading of Colombian manufacturing firms. Our empirical strategy exploits differences in firms’ sales across products and export destinations to create firm-specific measurements of exchange rate appreciation that gauge firms’ exposure to exchange rate shocks both abroad and at home. We link these new measurements of exposure with Colombian micro data on R&D investment and technology upgrading. The key finding is that real exchange rate appreciation drives significant reductions in firm-level R&D investment and a broader measurement of technology upgrading that includes expenditure on machinery, equipment, and ICTs. The estimated effects are quite large: a one-standard deviation increase in the real exchange rate (a shift that lies well within the experience of some firms over our sample period) induces a R&D investment reduction of 12% to 43% and a technology upgrading reduction of 18.8% to 37.6%, depending on the specification. Currency appreciation generally exposes Colombian manufacturing firms to greater foreign competition, but we find the firms that experienced greater exposure to Chinese competition saw even greater declines in R&D. Our estimated effects suggest that the resource boom and associated appreciation could have a significant and persistent negative effect on the productivity growth and technological development of Colombian manufacturing firms. Similarities between Colombia and other commodity-exporters suggest that these effects may be widespread.