The year is 2021 A.D. The positive relationship between innovation, firm performance and aggregate economic growth has long been entirely understood by everyone in the world. Well not entirely! One small country of indomitable Spaniards still holds out against economic reason. And life is not easy for the legionaries of innovation who garrison the fortified camps of the Congress of Deputies, Palace of Moncloa, and the fortifications of Autonomous communities of Spain…

😉 Well, you know what I mean…

The idea of this intro came to me while reading the first sentence of a new working paper by a young post-doctoral researcher at DICE, Heinrich-Heine University, Germany⁽¹⁾.

The positive relationship between innovation, firm performance and aggregate economic growth has long been understood (Schumpeter, 1934; Romer, 1990).

For a good reason she chose Spain to test the relationship of R&D and firm resilience during bad times. The paper focusses on the deepest recession in the last 70 years, the Great Recession of 2008, and use firm-level data for Spain, an economy that was severely affected by it.

Using data from the Encuesta sobre Estrategias Empresariales (ESEE) for Spanish manufacturing firms, published by SEPI Foundation, she finds convincing evidence that innovative firms in sectors most affected by the recession suffered less than non-innovative firms. The magnitude of the resilience of innovative firms is large. Firms in the sample belong to twenty manufacturing industries based on two-digit Classification of Economic Activities in the European Community (NACE) classification

Not great charts, but clear message, which by the way, most managers I have known are unable to grasp and/or put into practice (product differentiation versus cost/pricing):

Can being innovative help firms to shield themselves from the disruptive effects of a recession? Using data for Spanish manufacturing firms, this paper finds that innovative firms suffered considerably less compared to noninnovative firms during the Great Recession. The operating mechanism for the resilience of innovative firms to market disruption during a recession is product differentiation, and not reduction in marginal cost of production and prices with process innovation. The data does not support alternative explanations such as better access to capital, or difference in labour moving costs for innovative firms. The results provide evidence for the role of innovation in making firms dynamically capable and resilient to large negative shocks.

Gupta, A. (2019). R&D and firm resilience during bad times (University of Nottingham, GEP).

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(1) Gupta, A. (2019). R&D and firm resilience during bad times (University of Nottingham, GEP).

The two papers quoted in that first sentence are:

• Schumpeter, J. A. (1934). The theory of economic development: An inquiry into prots, capital, credit, interest, and the business cycle, Volume 55. Transaction publishers.
• Romer, P. M. (1990). Endogenous technological change. Journal of political Economy 98(5, Part 2)

Featured Image: Dirty mashup by the author of this blog (Sorry, posting in a hurry)