Who Innovates Out of the Crisis?

January 11, 2013 • Finance & Economics, Global Business, INNOVATION

The recent economic crisis has severely reduced the short-term willingness of firms to invest in innovation. But this reduction has not occurred uniformly. A few firms are swimming against the stream by increasing investment during the crisis. This has led to a greater concentration of innovative activities among firms already highly innovative before the crisis. Yet, there remains hope for dynamic entrepreneurs, as we see a small group of fast growing, new firms that also increase innovation investment during the crisis.


Gales of creative destruction
The economic crisis has meant that firms operate in environments characterized by greater uncertainties about the demand for (new) goods or services and their willingness to invest in innovation decreased1. The economic downturn is having a profound impact on firms’ innovation behaviour across Europe. The percentage of firms that increase innovation-related expenditures has fallen dramatically from 40.2% to 10.6% as a direct result of the crisis (see Figure 1). In turn the percentage of firms that decrease their spending on innovation surges from 10.8% to 26.7%. But also remarkable is the presence of a large number of firms that keep their innovation spending unchanged (which rose to 60% from around 50% before the crisis)2.



The impact of the economic downturn on firms’ innovation spending is also visible if we look at data across European economies. In Figure 2 below we plot the difference between the share of firms increasing and those decreasing their innovation spending relative to two periods: 2006-2008 and 2009. Results for the two periods are strikingly different. If we look along the x-axis (innovation expenditures in 2006-2008), all countries show a positive balance, that is, the percentage of firms increasing their innovation spending is higher then firms decreasing for all the considered countries. But if we turn to 2009 and read along the y-axis, we see that only four countries remain in a position where the share of firms increasing innovation activity outweighs that of firms decreasing. These four countries are located above the dot line, which corresponds to a balance equal to zero in 2009.

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