Why firms stop introducing innovations in the great recession: aggregate demand, financial constraints and risk

• Published in: Journal of science and technology policy management (Online) 2022-11, Vol.13 (4), p.869-897
• Main Authors: Ortiz, Javier, Salas-Fumás, Vicente
• Format: Article
• Language: English
• Subjects: Aggregate demand; Business; Business cycles; Companies; Constraints; Decisions; Economic conditions; Economic crisis; Economic development; Economic growth; Fiscal policy; Great Recession; Hypotheses; Innovations; Literature reviews; Macroeconomics; Modelling; Public finance; Public policy; R&D; Recessions; Research & development; Research & development expenditures; Research design; Research methodology; Risk; Risk management; Stabilization; Success; Technological change
• ISSN: 2053-4620; 2053-4639
• DOI: 10.1108/JSTPM-08-2020-0126

Purpose>With Spanish Community Innovation Survey data, this paper tests two main hypotheses as explanation of the fall in business innovation output in the Great Recession: the aggregate demand effect (firms have lower propensity to initiate innovation projects in recession than in contraction from demand-pull and profit expectations effects) and the risk effect (a greater proportion of the initiated projects fail in recessions than in expansions).Design/methodology/approach>The research methodology consists on first modelling the decision by firms to initiate innovation projects in t or not (probit model), and, second, modelling the outcomes, success or failure in t + 1 of firms that decide to initiate (Heckman model).Findings>The empirical results support the two hypotheses. They also indicate that the sensitivity of the decision to initiate innovation projects to the aggregate demand is more pronounced among financially constrained firms than among unconstrained ones, while the risk effect appears to be independent of the financial situation of firms.Research limitations/implications>The results of the research are limited by not being able to follow up individual innovation projects, and by not having available a more representative sample of firms where non-innovators and potential innovators are represented (now is biased toward potential innovators).Practical implications>The results highlight the importance of macroeconomic stability for sustained business innovation output over time and calls managers’ attention in better management of innovation risk.Social implications>The results of the paper recommend macroeconomic polies aimed at the stabilization of aggregate demand and smoothing the business cycle, as a way to contribute to the stabilization of the growth of innovation output over time. Monetary and fiscal policies that smooth the business cycle will then have significant effects in the stabilization of innovation output and, in turn, in the reduction of volatility of economic growth over time. Increasing the direct public financial aid to undertake innovation projects in recession periods will not have the same innovation output stabilization effect than the stabilization of the aggregate demand. The reason is that, as the paper points out, the innovation output of financially unconstrained firms is also affected negatively by the contraction of aggregate demand in recession periods.Originality/value>This paper is the first one to investig