Heterogeneous Innovation over the Business Cycle

Abstract

Schumpeter (1939) claims that recessions are periods of “creative destruction,” concentrating innovation that is useful for the long-term growth of the economy. However previous research finds that standard measures of firms’ innovation, such as R&D expenditures or raw patent counts, concentrate in booms. We argue that these measures do not capture shifts in firms’ innovative search strategies. We contemplate firms’ choice between exploration vs. exploitation over the business cycle and find evidence with more nuanced measures of patent characteristics that firms shift towards exploration during contractions and exploitation during expansions, with a stronger effect for firms in more cyclical industries.

The Impact of Regulation on Innovation

“…This is consistent with smaller firms accounting for a higher share of more radical innovation (e.g. Akcigit andKerr, 2018, on US data andManso et al, 2019).…”

“…Finally, the heterogeneous effects of demand shocks on types of innovation is also a theme in the literature of the effects of the business cycle on innovation (Schumpeter, 1939;Shleifer, 1986;Barlevy, 2007). Recent work by Manso et al (2019) suggests that large positive demand shocks (booms) generate more R&D, but this tends to "exploitative" (incremental) rather than "exploratory" (radical) innovation. We find that the impact of regulation following a demand shock discourages incremental (but not radical) innovation.…”

Weathering storms – Technological exploration of MNCs in times of financial crisis

“…Studies on the effect of recessions suggest that periods of economic decline may be associated with enhanced technological exploration. Manso et al (2021) find a positive correlation between recessions and technological exploration, measured as the fraction of patents in new classes of technology relative to patents in classes already know to the firm. Although crisis effects likely differ from those at play during periods of general economic decline, the combined results could suggest that during periods of financial crisis MNCs narrow the scope of technological exploration, while at the same time intensifying their activity in those relatively few classes of technology that are selected for future investments.…”

“…This is unfortunate, as MNCs control between one half and two thirds of the world's business research and development (R&D) (UNCTAD, 2005). In that capacity, they also play an important role in determining any pro-or countercyclical patterns in R&D investments and how these set the stage for long-term economic recovery (e.g., Francois and Lloyd-Ellis, 2003;Geroski and Walters, 1995;Manso, Balsmeier and Fleming, 2021;Wälde and Woitek, 2004; also, Barlevy, 2007;Fabrizio and Tsolmon, 2014). MNCs' international operations and geographically dispersed networks of foreign affiliates add particular complexity to their responses (Mudambi, 2011), as technological activity is often carried out within a structure that includes home-country units, foreign subsidiaries established through greenfield investments, and foreign acquired units.…”

Does religion impact corporate innovation in developing countries?

“…It is flawed. First, R&D expenditure only describes one apparent quantitative input (Aghion et al , 2013) and cannot explain multiple business innovation characteristics (Manso et al , 2017). Second, accounting rules make R&D expenditures difficult to capitalize or expense (Acharya and Subramanian, 2009).…”