May Blog: Covid-19 and the implications for future innovation

Over the last few days we have seen some inspiring and innovative responses to the Corona Virus crisis by UK firms and universities. The JCB-Dyson collaboration to produce ventilators and the UCL-Mercedes AMG collaboration to develop other breathing aids are outstanding examples. Necessity is the mother of invention after all.

But what of the wider consequences of the crisis for innovation in UK firms? Will these positive collaborations inspire broader innovation in the economy or will the financial pressures on firms have a more negative effect? How will this affect smaller and larger firms?

Most of the evidence suggests that R&D spending and innovation are ‘procyclical’ – rising in periods of strong growth and declining in periods of crisis. However, investing in innovation in periods of crisis can be beneficial for firms in the longer term[i] with innovators typically maintaining stronger post-crisis profitability and demonstrating greater resilience than non-innovators[ii].

Firms which have overcome previous periods of crisis also seem better able to weather future storms.  Past investments in R&D and innovation also matter with firms with a track record of innovation more likely to perform well through recessions, particularly where that innovation is based on new technology. Other non-technological innovations appear to benefit firms less in crisis periods but more in times of stronger economic growth[iii]

The Government has made significant resources available to firms to help them survive the current crisis. Despite this support it is likely that many firms will have lower liquidity and fewer financial reserves when the immediate crisis is over. How will these financial constraints impact innovation? Here, the picture is not necessarily straightforward. Financial constraints may reduce firms’ ability or willingness to invest in R&D or innovation which is always uncertain and risky. Constraints may also push firms towards safer more incremental innovation continuing a trend which was already evident before Corona Virus crisis started.

Financial constraints also tend to push firms towards more collaborative innovation in order to reduce costs and share risks. Supply chains are critical here with most firms turning to their customers or suppliers to find collaborators for innovation. Universities and other organisations such as the Catapult Centres also have an important role, particularly in sustaining more radical innovation[iv].

Sustaining levels of R&D and innovation through and after the crisis will certainly be challenging for both businesses and policymakers. The can-do attitude and commitment demonstrated by some of the UK’s leading businesses over the last few weeks is an inspiration, however. And, maintaining this commitment to innovation really matters: Countries which maintained a pro-innovation culture performed most strongly after the Great Recession (2008-13)[v].

Professor Stephen Roper, Director, ERC

[i] Amore, M. D. (2015). “Companies learning to innovate in recessions.” Research Policy 44(8): 1574-1583.

[ii] Juan A. Máñez Castillejo, J A Rochina-Barrachina. M E and Sanchis Llopis, J A (2010) SMEs’ strategies to face the onset of the great recession, No 1910, Working Papers from Department of Applied Economics II, Universidad de Valencia. Gupta, A (2019) R&D and firm resilience during bad times, University of Nottingham, Research Paper 2019/12.

[iii] Spescha, A. and M. Woerter (2019). “Innovation and firm growth over the business cycle.” Industry and Innovation 26(3): 321-347.

[iv] Hewitt-Dundas, N., et al. (2019). “Does learning from prior collaboration help firms to overcome the ‘two worlds’ paradox in university-business collaboration?” Research Policy 48(5): 1310-1322.

[v] Petrakis, P. E., et al. (2015). “Innovation and competitiveness: Culture as a long-term strategic instrument during the European Great Recession.” Journal of business research 68(7): 1436-1438.

 

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