R&D and Firm Resilience During Bad Times

Abstract

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 non- innovative 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.

Keywords: Innovation, Recession, Resilience, Product Differentiation, Dynamic Capability

JEL Classification: L25, O30, O31, E32