Innovation in the crisis and beyond

This chapter of the OECD Science, Technology and Industry Outlook 2012 provides an overview of the impact of the global financial and public debt crises on innovation and innovation policies.

Key messages

  1. 1. The economic crisis that started in 2008 has negatively affected business innovation and research and development (R&D) in all countries. The size of the effect and the impact on business innovation has differed widely across countries, depending on their situation at the eve of the crisis and on the policies they subsequently implemented.
  1. 2. Emerging countries in Asia, including Korea and China, have used the opportunity to demonstrate their strengths in innovation. They continue to outperform developed countries, relying on structural strengths that helped them face the crisis. The crisis has also rewarded large high-technology innovating firms; markets for these innovations will continue to be strong.
  1. 3. The crisis revealed the pre-crisis weaknesses of some countries (e.g. Greece and some southern and eastern European countries), sectors (e.g. the automobile sector) and types of innovations (e.g. financial innovations). Future prospects for innovation in these countries and industries will greatly depend on broader economic restructuring, which does not place innovation at the top of the immediate policy agenda although innovation will have to play a role in driving growth in the future.
  1. 4. Many OECD countries (northern Europe, Japan and the United States) have recovered somewhat. Their future innovation performance remains uncertain; it will depend on macroeconomic conditions but also on their ability to maintain innovation as a policy priority.
  1. 5. To date there is no evidence of a reallocation of resources towards more innovative businesses. While there have been more bankruptcies than before the crisis, new business entry has also been significantly depressed. Venture capital investment, which can help support entry of innovative firms, has yet to recover to its pre-crisis level.
  1. 6. Uncertainties over market conditions in the currently unstable global macroeconomic situation have inhibited investment in innovation. Large companies and banks are engaged in a process of deleveraging and hoarding that is detrimental to all types of investment, including innovation. Financing constraints have also increased but are not the main explanation to date for the weakening of innovation activities.
  1. 7. Many countries have implemented policies in support of innovation during the crisis. This has given innovation new prominence on the policy agenda; government responses to the crisis mainly focused on infrastructure investments for innovation and the provision of financial resources to businesses. As the budgetary crisis has developed, a number of governments have more recently started reducing their expenditure on innovation.
     

Policy lessons

  1. 1. Few innovation policies implemented in response to the crisis have addressed demand uncertainties effectively. Most countries have relied on traditional infrastructure and financial support instruments, whereas instruments aimed at reducing demand uncertainties could have speeded up the recovery process. Experimenting further with these types of policy tools, notably in sectors where potential demand is high (e.g. health, ageing, etc.), would help improve innovation and growth prospects.
  1. 2. The crisis has in many ways accentuated existing situations, including structural weaknesses in national innovation systems, and accelerated previous trends. Recovery policies that supported failing sectors were likely mistaken: market forces will continue to weaken them and they will eventually face similar difficulties. Instead, resources should be provided to sectors with growth potential, in parallel to industrial policies that facilitate resource redeployment, e.g. retraining programmes and R&D and entrepreneurship programmes that reduce costs of such restructuring.
  1. 3. Policies aimed at avoiding employment losses and supporting training are essential to avoid damage to innovation systems. Such policies do not only matter from a social perspective. From the perspective of innovation i) the lack of enterprise creation to absorb unemployed workers, ii) the lower quality of matching skilled workers to adequate employment available during recessions as well as iii) the importance of employees’ tacit knowledge for firms’ innovation processes are the main arguments for employment support during downturns.

Acknowledgements

The chapter on “Innovation in the crisis and beyond”, was prepared by Caroline Paunov and received input from Fernando Galindo-Rueda, Valentine Millot and Andrew Wyckoff. Winfrid Blaschke, Sebastien Martin and Gert Wehinger of the OECD Directorate for Financial and Enterprise Affairs (DAF) provided statistical material and comments. Delegates of the OECD Committee for Scientific and Technological Policy (CSTP) contributed significantly through their responses to the biennial STI Outlook policy questionnaire and their comments on the drafts. Participants at the OECD Thematic Workshop on Financing R&D and Innovation in the Current Macroeconomic Context, held in December 2011 at the OECD headquarters, also contributed greatly to this chapter.

Further reading

Innovation in the crisis and beyond