Economic decline hurts businesses’ ability to innovate

While Winston Churchill was famously supposed to have remarked that we should never waste a crisis, the reality is that during recessions, firms often tighten their belts and reduce the amount they invest in innovation. Of course, Churchill's dictum rests on the way in which crises can prompt us to reassess that which we had previously taken for granted and look for new ways of doing things. Research from Kellogg explores whether that is really the case or not. "We examine innovation following the Great Depression using data on a century’s worth of U.S. patents and a difference-in-differences design that exploits regional variation in the crisis severity," the researchers explain. Innovation during recessions The study found that there was a steep decline in inventors' patents during the depression, with this seemingly driven by reduced levels of funding due to the economic crisis. Bigger firms were generally better equipped to weather this situation, however, and the reduction in competitor's activity may actually have benefitted them. In short, while smaller, independent innovators reduced their activity, the activity of larger firms tended to hold steady, with the authors suggesting that perhaps the independent innovators sought more certainty at larger firms. "It's widely accepted that being innovative today is getting more expensive, but this is generally okay during good times as access to capital is more readily available so smaller firms can still innovate successfully," says Anthony Durkacz, CEO of Nasdaq-listed FSD Pharma, "This generally isn't the case during a recession, however, as investors and lenders tend to take a more safety-first approach, which usually favors bigger firms with a proven track record and income already coming in." A similar outcome was seen via Harvard research, which looked at whether individuals wanted to work for startups or bigger firms during the Covid pandemic. Safer option The researchers tracked job applicants on the AngelList Talent website, which is a leading platform for startups to hire talent. The analysis revealed a distinct shift in job searchers towards larger companies after the national state of emergency was officially declared by federal officials on the 13th of March. This flight towards larger firms was especially pronounced among higher-quality and more experienced talent, thus leaving startups with a smaller and lower-quality pool of talent to pick from. It’s a phenomenon that the researchers believe has profound implications.