Apoorva Gupta

R&D and firm growth in bad times

Abstract:  Can being innovative help firms to mitigate the disruptive effects of a recession? Using firm-level data for the Spanish manufacturing sector, this paper finds that firms with ex-ante higher R&D investment suffered considerably less compared to non-innovative firms in industries that were severely hit during the Great Recession. This effect is explained by R&D allowing firms to invest more intensively in product differentiation when times are bad, thus enabling them to adapt to rapidly changing external environment. The data does not support alternative mechanisms such as cost reduction with process innovation, lower financing constraints, or higher availability of trapped factors for innovative firms. There is evidence that the marginal cost of innovative firms increases, and markups decrease when they are hit by a negative shock. The results suggest that R&D makes firms more dynamically capable, adding a third element to its well established dual role of facilitating innovation and learning through absorptive capacity. 

Lunch from 12.30pm