Institutional Transitions, Research and Development, and Exports from India

Abstract Research and development (R&D) capabilities generally enable firms to export more. Left underexplored is this question: Does the positive relationship between R&D and exports hold during institutional transitions, which are fundamental and comprehensive changes introduced to the rules of the game? Among India's wide‐ranging market‐oriented institutional transitions, the implementation of the Foreign Exchange Management Act (FEMA) provides a natural experiment that helps us examine this question. Leveraging 22,049 firm‐year observations (with 5532 unique firms), our evidence suggests that although FEMA enabled innovative firms to generate more exports during the pre‐FEMA period, the positive relationship between R&D and exports ceased during the post‐FEMA period. We conclude that institutional transitions may not always yield positive effects.