Economic crisis and innovation

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Economic crisis and innovation
Banca d'Italia lunedì 25 novembre

• Andrea Filippetti
• London School of Economics and Political Science,
  and
• Italian National Research Council, CNR

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Creative destruction or creative accumulation?

• Schumpeter 1911
• economic environment characterized by fierce
  competition in which the new firm is the driver
  of innovation activity supported by the creation
  of new credit by the banking system

• Schumpeter 1942
• emphasized the role of well established large
  firms
• market structure has shifted into oligopolistic
  competition

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Gerhard O. Mensch
1979 Stalemate in Technology
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stagnation and innovation for recovery overlap
at the same time that wide areas of current
economic interests are gripped by stagnation,
creative progress is building in new areas of
activity in the technological stalemate, the
economy becomes structurally ready for basic
innovations
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The SPRU response It is innovation diffusion
that matters!
Freeman, Clark and Soete (1982)
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In a Schumpeterian vein, there are winners and
losers

• And the existence of losers is the guarantee that
  there will be some winners
• Nations, industries and companies that will
  manage to introduce and adapt to the
  technological change are likely to grow and
  prosper
• Those that will not be able to do so, will be
  most affected by the economic crisis
• Implicit assumption barriers to enter new
  technological fields are low

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A dissenting voice Keith Pavitt

• Competences are generated in a cumulative pattern
• This applies for international patterns of
  technological accumulation
• It also applies at to company level
• Little possibility for new entrants when facing
  large innovative firms

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Technological Accumulation

• To innovate, companies need to develop
  competences, which are created through
  experience. Innovators of the future are likely
  to be the innovators of the past
• Persistence is the key factor in generating
  successful innovations
• Also nations generally continue to innovate in
  the areas where they are traditionally strong
• Management literature

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Are creative destruction and technological
accumulation sensitive to the business cycle?

• During economic expansion, innovative firms lead
  technological change also by increasing their
  investment in innovation (supporting
  technological accumulation)
• Economic crises generate turbulence and some new
  entrants are willing to spend more to innovate,
  also in blue sky explorations (creative
  destruction). Resources made available can be
  used for the purpose

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2 levels of analysis

• Firm level
• Country level

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An application with micro data on panel analysis

• Economic crisis and innovation Is destruction
  prevailing over accumulation?
• Daniele Archibugi, Andrea Filippetti, Marion Frenz

http//www.sciencedirect.com/science/article/pii/S
004873331200162X
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Our argument

• there is a general consensus on the fact that the
  most innovative firms are also more likely to
  persist in innovating
• firms with a more agile/flexible structure might
  take better advantage of changing environments
  and new market opportunities
• the unique environment of the current economic
  crisis might challenge innovation in a cumulative
  fashion and lead to an environment more closely
  related to creative destruction

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4 hypotheses
Hypothesis 1. During a crisis innovation
investment concentrates further in those firms
that were already highly innovative before the
crisis
Hypothesis 2. Increased investment in innovation
during the crisis is more strongly correlated
with two groups of firms (a) those previously
classified as great innovators and (b) those
classified as fast growing new entrants
Hypothesis 3 Increase in investment in innovation
before and during the crisis is positively
associated with internal RD, firm size and firm
internal financial resources
Hypothesis 4. Firms that follow mixed strategies
of exploitation and exploration ambidextrous
firms are more likely to increase investment in
innovation during the crisis compared with before
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Data The UK Innovation Surveys

• under 2,500 enterprises that responded to the
  latest three waves of the UK version of the CIS
  (2004, 2006 and 2008)
• we analyse a balanced panel with observations at
  three points in time (T3).

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The dependent variables
Variables N. of firms Mean
Total innovation expenditure per employee in 2006 in 000s 2,479 2.44
Total innovation expenditure per employee in 2008 in 000s 2,485 2.04
we require a measure of the change in innovation
related investment before and during the crisis
DV1. We compute the change in 2008 compared with
2006 and use this as the change in innovation
expenditure during the crisis. DV2. Before the
crisis is the change in innovation investment in
2006 compared with 2004
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  Variable Name Description Hypothesis
1 Log change in innovation expenditure in 2006 and 2008 Log of innovation related investment compared to previous period Dependent variable
2 Log total innovation expenditure in 2004 and 2006 Log of innovation expenditure in the previous period Control variable
3 Great innovators in 2004 Dummy variable. Great innovators are enterprises that introduced new-to-the-market goods and services in 2004 Testing H1 and H2 - Great innovators increase innovation expenditure during the crisis
4 Newly established 2000 Dummy variable. Enterprises established between 2000 and 2004, value 1, others 0 Control variable
5 Growth of newly established firms in 2006 and 2008 Log of the change in turnover compared to previous period for new firms as defined in (4). This variable takes a value of zero for firms established before 2000 Testing H2 Fast growing new enterprises increase innovation expenditure during the crisis
6 Internal RD in 2004 and 2006 Dummy variable. Enterprises with internal RD expenditure in the previous period, value 1, others 0 Testing H3 Enterprises with internal RD increase innovation expenditure during the crisis
7 Log employees in 2004 and 2006 Size of the firm according to the number of employees in the previous period Testing H3 Large enterprises increase innovation expenditure during the crisis
8 Availability of finance in 2004 and 2006 Dummy variable. Firms which gave in the previous period medium or high importance to the availability of finance as innovation obstacle, value 1, firms that gave no or low importance, value 0 Testing H3 Enterprises with internal financial resources increase innovation expenditure during the crisis
9 Log sales per employee in 2004 and 2006 Log of sales per employee in the previous period Testing H3 Enterprises with higher sales per employee (as proxy of available internal resources) increase innovation expenditure during the crisis
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10 Exploration in 2006 and 2008 Dummy variable. Firms in the upper two quartiles in the sum of the scores across four-point likert scales in the question how important were each of the following factors in your decision to innovate (i) increase range of goods or services (ii) entering new markets or increased market share, value 1, others 0. Dummy variable. Firms in the upper two quartiles in the sum of the scores across four-point likert scales in the question how important were each of the following factors in your decision to innovate (i) increase range of goods or services (ii) entering new markets or increased market share, value 1, others 0. Control variable
11 Exploitation in 2006 and 2008 Dummy variable. Firms in the upper to quartiles in the sum of the scores across four-point likert scales in the question how important were each of the following factors in your decision to innovate (i) improving quality of goods or services (ii) improving flexibility for producing goods or services (iii) increasing capacity for producing goods or services (iv) reducing costs per unit produced Control variable Control variable
12 Ambidexterity in 2006 and 2008 Dummy variable. A firm is in the upper quartiles with respect to both - exploration and exploitation (see 11 and 12), value 1, others 0 Testing H4 Enterprises that follow mixed strategies of exploitation and exploration ambidextrous enterprises, increase innovation expenditure during the crisis Testing H4 Enterprises that follow mixed strategies of exploitation and exploration ambidextrous enterprises, increase innovation expenditure during the crisis
13 IPRs in 2004 and 2006 Dummy variable. Firms that declared to use IPR protection in the previous period, value 1, others 0 Control variable Control variable
14 Skills in 2006 and 2008 Log of the proportion of employees that hold a degree at BA/BSc level or above. Control variable Control variable
15 International markets in 2006 and 2008 Dummy variable. Enterprises that operate outside the UK, value 1, others 0 Control variable Control variable
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Innovation expenditure of great innovators and
other firms, 2006 and 2008
  n. of firms Percentage Share of innovation exp. 2006 Share of innovation exp. 2008 Average innovation exp. 2006 in 000s Average innovation exp. 2008 in 000s Change in average innovation exp. 2006-2008
All other firms 2,161 87 0.79 0.63 563 413 -0.27
Great innovators 324 13 0.21 0.37 981 1,599 0.63
Total 2,485 100 1.00 1.00 618 568 -0.08
Hypothesis 1. During a crisis innovation
investment concentrates further in those firms
that were already highly innovative before the
crisis
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Regression results
Innovation behaviour before and during the
crisis. DV change in innovation expenditure
before and during the crisis
before the crisis during the crisis

Great Innovators 2004 not significant ()

Newly established 2000 - () - ()

Fast grow. new firms t not significant ()

In-house RD t-1 not significant ()

Log employees t-1 () ()

Availability finance t-1 not significant not significant

Sales per employee t-1 () ()

Explorative strategy t 0.31 0.6

Exploitative strategy t 0.6 0.38

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Conclusions

• Firms in our sample reduce innovation expenditure
  in 2008 by 8 percent compared to 2006. No doubt
  that the crisis has brought some destruction
• strong support for creative accumulation. Firms
  identified as the great innovators in 2004 are
  responsible for a larger share of innovation
  expenditure in 2008
• being a great innovator does not predict increase
  in innovation investment before the crisis, but
  it does during the crisis

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... continued

• another category of firms which is gaining
  momentum during the crisis they are the fast
  growing new firms
• this group of firms does not show an above
  average behaviour in 2006 but it starts to
  increase expenditure during the crisis.

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... continued

• size and economic performance play a less
  important role.
• presence of in-house RD activity becomes a major
  predictor of increase in innovation expenditure
  during the crisis
• firms strategy, pursuing an explorative strategy
  (including looking into new markets), becomes
  relatively more important.

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Innovation persistence and the institutional
setting
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National Innovation System the founding
fathersFreeman, Lundvall, Nelson
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National systems of innovation
Government
Science technology institutions e.g. RD
labs, unis
Financial institutions e.g. banks, venture
capitalists
Firms
Industry e.g., competitors, suppliers
Education institutions
Source Smith (2006), p. 295
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do specific configurations of NSI provide a
comparative institutional advantage in times of
crisis?
Thus the first general question at stake is
whether structure matters vis-à-vis demand during
a big recession
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Data and methodology (1)

• Innobarometer 2009 (European Commission) firm
  level survey on more than 5000 firms across
  Europe April 2009
• Question no. 1 Compared to 2006, has the amount
  spent by your firm on all innovation activities
  in 2008 increased, decreased, or stayed
  approximately the same?
• Question no. 2 In the last six months November
  2008 to April 2009 has your company taken one of
  the following actions increased, decreased or
  maintain the innovation spending as a direct
  result of the economic downturn?

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Data and methodology (2)

• European Innovation Scoreboard 2008 (EIS)
• (European Commission) aims at measuring and
  comparing the innovation performance at country
  level based on a composite indicator
• The EIS Summary Innovation Index composed of 29
  variables addressing 7 dimension of a country
  system of innovation

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Firms innovation investments comparison between
the three years period 2006-2008 and the first
six months of 2009
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Is the crisis impairing the catching-up process
of innovation capabilities?
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The impact of the current recession on firms
innovation investments
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Change in the behaviour of the firm related to
its innovation investment as a response to the
crisis vis-à-vis the period before the crisis
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Operationalizing the national innovation system

• point out those country-specific features which
  have a role in offsetting the cyclical behaviour
  of the firms, and therefore that have a positive
  influence on persistency of innovation
  investment.
• The following different characteristics of the
  NSI have been derived from the EIS
• i. the stock of knowledge
• ii. the quality of the human resources I
• ii. the depth of the financial and credit system
  
• iv. the specialization of the country

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Operationalizing short-term conditions
The drops in the domestic demand and export, 1st
term 2008 3rd term 2009
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Ordered logit model, robust estimates (dependent
variable INVchange)
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Is innovation cyclical or persistent?

• One of the most significant results of our
  analysis is that about sixty-five per cent of the
  firms declare to have kept their innovation
  investment unchanged in spite of the crisis
• This somehow confirms the importance of
• technological accumulation (stressed, among
  others, by Nelson and Winter, 1982 Grandstrand
  et al., 1997 Patel and Pavitt, 1997),
• and lends substantial support to the persistency
  of innovative activities over time (Geroski et
  al., 1997 Cefis and Orsenigo, 2001).

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The uneven effects of the crisis and the role of
National Systems of Innovation

• the crisis has not been of the same magnitude
  across all European countries. On the contrary,
  we have shown that the most negatively affected
  by the downturn are those EU New Member States
  which were catching up over the 2006-2008 period
• We have attempted to explain this evidence on the
  ground of the structural characteristics of the
  NSI and the role played by domestic demand and
  export.

The structural characteristics of the NSI seem to
play a more relevant role than demand.
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The role of the institutional framework

• Innovation, labour market institutions and skills

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Social protection and the formation of skills
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Labour market institutions

• different institutional arrangements have been
  identified namely along three main dimensions
• (i.) unemployment security,
• (ii.) employment protection, and
• (iii.) vocational and educational training (VET).

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Labour attachment

• the attachment of factors of production to a firm
  favors incremental innovation and discourages
  radical innovation
• CMEs specialize in incremental innovation because
  employment protection, low inter-firm mobility,
  insider control of firms and weak markets for
  corporate control
• LMEs are said to specialize in radical innovation
  because the factors of production can be rapidly
  mobilized for a promising new project, and
  de-mobilized if it fails

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2 types of attachment mechanisms

• Institutional constraints i.e. EP - that make it
  costly for the firm to shed labor this type of
  exogenous attachment encourages investment in
  specific skill and generates ongoing teams of
  skilled production workers (exogenous)
• attachment is not imposed institutionally through
  EP, but created endogenously by skill. A worker
  with experience in a particular firm, or a team
  of such workers, may generate for a firm a
  quasi-rent a situation in which the worker is
  more valuable when employed by the firm than in
  the workers next-best employment

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Country-level variables
  Absolute values Absolute values Absolute values
Country Employment protection index (EP) Replacement rate (RR) Vocational and education training (VT)
Austria 1.93 62.21 77.05
Belgium 2.18 63.14 55.76
Czech Republic 1.96 67.36 73.72
Denmark 1.5 77.76 53.74
Finland 1.96 72.4 54.79
France 3.05 71.38 43.8
Germany 2.12 66.46 57.48
Greece 2.73 49.14 32.06
Hungary 1.65 73.22 26.64
Ireland 1.11 59.62 32.67
Italy 1.89 65.52 59.77
Luxembourg 3.25 87.64 60.37
Netherlands 1.95 77.95 67.64
Norway 2.69 72.22 55.24
Poland 1.9 64.14 46.54
Portugal 3.15 78.91 33.24
Slovak Republic 1.44 59.78 71.88
Spain 2.98 72.83 43.83
Sweden 1.87 70.52 59.46
Switzerland 1.14 79.65 64.8
United Kingdom 0.75 57.05 23.61
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conclusions

• RR (our measure of unemployment protection) and
  VET are complementary.
• So are EP and VET.
• When both forms of income insurance are low, VET
  is actually associated with lower levels of
  innovation persistence

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• income insurance / VET systems have a comparative
  advantage in the production of specific skills,
  this supports the view that specific skills are
  better for sustaining innovation during a crisis
  than general skills.
• We find no substantial difference between the
  performance of flexicurity (high RR, high VET)
  and non-liberal (strong EP, high VET) systems.

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