4. Impact Financial Crisis

The financial crisis which started in 2007 has triggered a global economic downturn. This has resulted in at first falling economic growth rates followed by a real economic decline in many countries. Indicators of innovation performance, including those used in EIS, have a time lag of one or more years and therefore do not yet reveal the full impact of the crisis that reached its height in the second half of 2008.

A thematic paper has been produced [1] based on an analysis of the Innobarometer 2009 survey of innovating firms in the EU27 which was conducted in April 2009.  The survey data indicates that 23% of innovative firms had decreased their innovation expenditures as a direct result of the economic downturn, and that 29% of firms expected their 2009 innovation expenditures to be lower than in 2008. This showed a marked transition from the period 2006-08 where only 9% of firms had decreased innovation expenditures. The analysis in this paper uses micro-data from the survey to analyse which factors appear to have influenced firms’ decisions to reduce innovation expenditure and to consider what the longer term impacts of this could be. The main findings are as follows.

Firms that are more innovative are less likely to cut back on innovation expenditures. This finding goes against the initial hypothesis that firms with higher levels of innovation expenditure would be more likely to cut back. It is a positive finding and suggests that the EU27's most innovative firms may be relatively less affected by the economic crisis. Moreover, the analysis shows:

• Firms where innovative products and services account for a larger share of sales are less likely to reduce innovation expenditures.
• Firms that perform R&D as part of their innovation activities are less likely to reduce overall innovation expenditures.
• At the firm level, there is no significant difference between those with high overall innovation expenditures and others in the likelihood to have reduced innovative expenditures. However, at the sectoral level, firms in the medium to high innovation intensive sectors are more likely to expect to cut their innovation expenditures.
• Firms that view cost cutting as the main source of future competitive advantage are more likely to reduce innovation expenditures.

Firms pursuing broader innovation strategies are in some cases less likely to have reduced their innovation expenditure. This finding tends to support the hypothesis that broader strategies (i.e. that include user innovation, open innovation etc.) make firms more resilient to economic downturns. This is consistent with the EIS thematic paper on user innovation, which shows that "user innovator" firms tend to be more successful innovators. However the findings are inconclusive in that:

• Firms with innovation strategies that involve users and those that use knowledge management systems, are less likely to expect to reduce their innovation expenditures.
• However firms with strategies to integrate different activities in support of innovation (such as staff rotations, but also knowledge management systems) are more likely to have reduced their innovation expenditures in the recent past.

The economic crisis may lead to a reversal of the convergence between EU27 countries in innovation performance. The 2008 European Innovation Scoreboard showed a clear process of convergence between EU27 Member States. In the 2009 Scoreboard, this process is less clear but this still does not capture the full impacts of the crisis as most data come from 2007 and 2008. The findings in this report suggest that the rapid advances in innovation performance made in many lower performing countries may not be maintained, at least in the short term, due to the severity of the economic crisis.  More specifically, the analysis shows that:

• Firms in countries which have been experiencing the fastest rates of improvement in their innovation performance have been affected most by the economic crisis.
• Firms in countries with the largest economic downturns are more likely to reduce their innovation expenditures.

Public support appears to have helped firms maintain innovation expenditures. The analysis of other factors with a significant effect on which firms decreased innovation expenditure shows that firms that have experienced a positive effect of improved financial public support are less likely to cut their innovation expenditures and more likely to have increased their expenditures. This suggests the increased importance of public support focusing on innovative firms at times of economic crisis.

Firms serving international markets and public procurement markets are more likely to reduce innovation expenditures. More specifically:

• Firms whose lead market is their own country are less likely to reduce their innovation expenditures. Similarly, firms operating on international markets are slightly more likely to decrease their innovation expenditures. This may reflect a retrenchment of firms' activities in their home markets, and points to the need to reopen export markets for innovations as part of the economic recovery.
• Firms that show interest in public procurement are slightly more likely to have decreased their innovation expenses. This is an unexpected finding as many economic stimulus packages have increased public procurements. It may however reflect that many such procurements do little to stimulate innovation and points to the broader problem of public sector purchasing decisions which favour non-innovative solutions.

Firm size does not appear to be a relevant factor.  The analysis, somewhat surprisingly, finds no difference between small and large firms in their likelihood to have reduced innovation expenditures, although medium-sized firms (50-249 employees) appear less likely to further reduce their innovation expenditures.