Exchange Rate Level, Innovation, and Obstacles to Growth. Who Needs a Weak Zloty?

We have adopted Rodrik’s “undervaluation” hypothesis to verify the conjecture that innovative firms in Poland opt for a weak currency because they face obstacles in the labour and financial markets. We do it by exploring a new data-base on Polish manufacturing exporters in order to find some interrelations between the exchange rate level and innovation activity. Our findings suggest that a weak Zloty is preferred by exporting firms that have carried out product and process innovations and registered a trademark, patent or claimed a copyright. We confirmed that financial constraints and labour market regulations were important factors preventing the growth of innovative firms. Based on the research on Polish firms, we claim that although innovative companies use technology to gain competitive advantage, their success and innovation activity also hinge on prices in general and on a weak exchange rate in particular because it helps to overcome market imperfections related to financial and labour resources.