Observations

Innovation in the recession: willing, but not necessarily able

Date: 30 January 2009
Authors:
Publisher: IFS

The latest annual survey of Business Enterprise Research & Development, released by the Office for National Statistics this morning, shows another real increase in R&D spending during 2007, in line with growth in real national income. But will the recession throw this into reverse?

 

Not necessarily. During a recession the cost of investing in innovation is lower than in times of expansion. Labour and other inputs are less in demand, and likely to be cheaper. The firm's internal resources are also likely to be underutilised, so undertaking innovative activities will be less costly.

 

Imagine a retail firm thinking about implementing a new computer system to monitor stock flow. It may find that a recession a good time to do so. Shutting the store to install the new equipment, and diverting staff away from sales work to train them will be less costly when the firm is selling less. Managers will have more time to spend reorganising current practices, and workers are likely to be more willing to accept change when their job security is less certain. It may also be a good time to lay off workers and replace them with new ones with more appropriate skills. Tougher business conditions may also encourage Research and Development (R&D) into new products or processes, as the search for productivity gains intensifies.

 

The notion that downturns are not necessarily bad for innovation fits into to the 'pitstop' view of recessions, as being a period when firms can take the time and resources to reorganise their activities and invest in new ideas. Recessions may therefore spur activities which enhance long run growth.

 

However, although firms may wish to invest more in innovation, they may lack the finance to do so - especially given banks' current reluctance to lend. Reorganising management practices or retraining workers may be relatively cheap and not need external finance. But a firm wishing to introduce new technology may need credit to buy and install the new equipment.

 

So whether the recession turns out to be good or bad for innovation remains an open question. Firms may be keener to invest in it than you might imagine, but whether they are able to do so will depend in no small part on when the banks are happy to lend again.