1. Economic crisis and innovation
Banca d'Italia lunedì 25 novembre
Economic crisis and innovation
Andrea Filippetti
London School of Economics and Political Science, and
Italian National Research Council, CNR

2. 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

3. Gerhard O. Mensch
1979: Stalemate in Technology

4. 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”

5. The SPRU response: It is innovation diffusion that matters!
Freeman, Clark and Soete (1982)

6. 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

7. 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

8. 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…

9. 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

10. 2 levels of analysis
Firm level
Country level

11. An application with micro data on panel analysis
Economic crisis and innovation: Is destruction prevailing over accumulation?
Daniele Archibugi, Andrea Filippetti, Marion Frenz

12. 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

13. 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 R&D, 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

14. 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 (T=3).

15. The dependent 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

16. Log change in innovation expenditure in 2006 and 2008
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 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 R&D in 2004 and 2006
Dummy variable. Enterprises with internal R&D expenditure in the previous period, value 1, others 0
Testing H3 – Enterprises with internal R&D 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

17. International markets in 2006 and 2008 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.
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 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 13
IPRs in 2004 and 2006
Dummy variable. Firms that declared to use IPR protection in the previous period, value 1, others 0 14
Skills in 2006 and 2008
Log of the proportion of employees that hold a degree at BA/BSc level or above. 15
International markets in 2006 and 2008
Dummy variable. Enterprises that operate outside the UK, value 1, others 0

18. 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 in £000s
Average innovation exp in £000s
Change in average innovation exp
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
Total
2,485
100
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

19. 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
In-house R&D t-1
Log employees t-1
Availability finance t-1
Sales per employee t-1
Explorative strategy t
0.31*
0.6**
Exploitative strategy t
0.38*

20. Conclusions:
Firms in our sample reduce innovation expenditure in 2008 by 8 percent compared to 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

21. ... 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.

22. ... continued
size and economic performance play a less important role.
presence of in-house R&D activity becomes a major predictor of increase in innovation expenditure during the crisis
firm’s strategy, pursuing an explorative strategy (including looking into new markets), becomes relatively more important.

23. Innovation persistence and the institutional setting

24. National Innovation System: the founding fathers Freeman, Lundvall, Nelson

25. National systems of innovation
Government
Science & technology
institutions;
e.g. R&D labs, unis
Financial institutions
e.g. banks,
venture capitalists
Firms
Industry
e.g., competitors,
suppliers
Education
institutions
Source: Smith (2006), p. 295

26. 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

27. 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?”

28. 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

29. Firms’ innovation investments: comparison between the three years period and the first six months of 2009

30. Is the crisis impairing the catching-up process of innovation capabilities?

31. The impact of the current recession on firms’ innovation investments

32. 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

34. 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

36. Operationalizing short-term conditions
The drops in the domestic demand and export, 1st term 2008 – 3rd term 2009

37. Ordered logit model, robust estimates (dependent variable: INVchange)

38. 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).

39. 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 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.

40. The role of the institutional framework
Innovation, labour market institutions and skills

42. Social protection and the formation of skills

43. 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).

44. 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

45. 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 worker’s next-best employment

46. Country-level variables
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
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

50. 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

51. 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.