Innovation During Challenging Times

Danilo Cascaldi-Garcia, Marija Vukoti and Sarah Zubairy
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Marija Vukoti: University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: When is receiving positive news regarding future technological advancements most impactful on the economy: during recessions or economic booms? A recession might represent an opportune time for investing in relatively cheaper, productivityenhancing activities. However, tighter financial constraints during recessions might hinder the ability to secure funds for these activities. We explore this dichotomy by exploiting patent-based innovation shocks, which are constructed using changes in stock market valuations of firms that obtain patent grants. We find that aggregate patent-based innovation shocks have a greater impact on the economy during recessions, leading to a more significant increase in private investment. Additionally, our exploration of firm-level data uncovers supporting evidence that firms tend to boost their capital investment and R&D expenditures in response to these innovation shocks, particularly during recessions. The financial constraints of firms play a crucial role, with capital investments by firms with low default risk driving the larger impact observed during recessions.

Keywords: Innovation shocks; Patent-Based Innovation Index; Financial Frictions; Firms heterogeneity; State dependency (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ent, nep-fdg, nep-ino, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1475

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