How important are capital controls in shaping innovation activity?

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Drawing from an expansive dataset spanning 53 developed and emerging countries across 1996–2016, and employing a fixed effects identification strategy alongside appropriate instrumentation, our study uncovers compelling insights. We identify a robust inverted U-shaped correlation between capital controls and R&D investment. Initially, these restrictions prove beneficial for fostering R&D spending but reach a tipping point where they exhibit detrimental effects, especially concerning patent development. Furthermore, our inquiry delves into the composition of restrictions within the aggregate capital control index. Our findings reveal that limitations on equity-based finance significantly influence innovation activity, while constraints on credit (bank) and direct investment assets demonstrate no discernible impact

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