Whether you are building a more energy efficient e-bike or designing the world’s warmest winter jacket, investing in research and development (R&D) is key to developing the next big thing. But investing in R&D doesn’t just help you develop innovative products. It can also help make a business more resilient during turbulent economic times -- the kind we are living through right now.

With a population slightly more than 40 million people, Canada is a relatively small market compared to the United States, European Union or China. So Canadian manufacturers tend to be export-oriented, and when the Canadian dollar is low, they have a built-in advantage. The low dollar makes it cheaper to pay workers, and goods sold to buyers in other currencies net more Canadian dollars at home. But when the Canadian dollar is high, the reverse is true, and manufacturers’ costs rise. A high dollar is a kind of stress-test for exporters, and some struggle to compete.  

Research by Rotman professor Walid Hejazi has found that when the value of the Canadian dollar rises, companies that invest in R&D fare better than those that don’t. In research published in the Canadian Public Policy journal Hejazi and his co-authors Jianmin Tang and Weimin Wang studied the performance of Canadian companies between 2002 and 2019, including periods where the value of the dollar was high and periods when it was low.

“Between 2002 and 2007, the Canadian dollar increased by 65 per cent,” says Hejazi. “That means foreign buyers had to pay up to 65 per cent more for products from Canada. Our exports fell, but not all companies were equally affected.”

During this period, companies that made R&D investments outperformed those that didn’t. The reason likely lies in the distinctiveness of the products; companies that invested in R&D – and thus innovation – had more distinctive product offerings than those that didn’t, the paper found. Those distinctive products saw a less significant decline during periods of high currency rates, making companies that made them much more likely to survive the economic turbulence.

“When people really want a product, they buy it because of its quality and distinctiveness,” says Hejazi. “But for less distinctive products, price is the determining factor. Exports of less-distinctive products fell significantly when the Canadian dollar appreciated. When our dollar is low, people will buy Canadian products because they are inexpensive, but they are not necessarily doing it because our products are good quality. And when prices go up, they will just substitute that product with something else.”

To illustrate the point, Hejazi points to Toronto-based apparel company Canada Goose, a maker of high-end outerwear. During a 2019 trip to New York City, he came across a display of the company’s distinctively-branded jackets at one of the city’s high-end department stores.

“There were about a hundred Canada Goose jackets on display at higher prices than we pay in Canada -- even in U.S. dollars,” Hejazi says. “The manager told me they were their top seller, and were largely purchased by European tourists. When you think about the kinds of products that people will buy at higher prices, it is the products that are distinctive -- the ones they really want.”

Other winter coats just don’t strike the same balance of warmth and style as Canada Goose’s products do. People are willing to pay a little more for that, and will keep buying, even as prices rise. Hejazi’s research found this is not unusual. Using Statistics Canada’s National Accounts Longitudinal Microfile data set to conduct analysis of firms’ expenditures, performance and survival, he found that between 2002 and 2019, exporters that invested in R&D performed significantly better than those that did not, especially in periods when the dollar is higher. In some cases, companies that invested in R&D outperformed those that didn’t by upwards of 36 per cent during high-dollar periods. During the 2008-2009 financial crisis, these companies were more than 105 per cent more likely to survive the global downturn, and subsequent increase to the Canadian dollar.

“We have known for a long time that companies that invest in R&D are more productive, but our research shows they are also more resilient in the face of exchange rate fluctuations,” Hejazi says. “People will continue to buy high-quality products, even when fluctuations in the exchange rate make them more expensive in foreign markets.”

It is well-established that movements in the exchange rate affect trade patterns, but there has been much less research into how this plays out at the level of individual companies. Hejazi’s research sheds light on how movements in the exchange rate have an effect on a company’s long-term viability. It highlights that investing in R&D can help insulate companies from the effects of a fluctuating dollar, which are simply a fact of life in Canada’s export-driven, natural resource-intensive economy.

“When the Canadian dollar is low relative to our major trading partners, Canadian companies have a cost advantage, and can export relatively easily,” says Hejazi. “But investing in R&D is still smart. The value of our dollar can appreciate or depreciate significantly, and R&D intensive companies fare better when it does. We found that when the exchange rate went up, companies that did not know how to do innovation suffered, and many exited the market. They went bankrupt. Companies that did R&D and exported innovative products were much more likely to survive.”

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