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Demand drops and innovation investments: Evidence from the Great Recession in Spain

Alex Armand () and Pedro Mendi

Research Policy, 2018, vol. 47, issue 7, 1321-1333

Abstract: The Great Recession, which began in 2008, brought about large contractions in aggregate consumption in many countries. In this research, we study the impact of heterogeneous decreases in demand on innovation investments by analyzing the evolution of innovation investments in a panel of Spanish manufacturing firms during the 2004–2013 period. We proxy heterogeneous variation in demand with net exit rates in the productive stratum of each firm, defined as the group of firms in the same industry and size class. These net exit rates are computed considering all firms in the stratum, including firms that are determined to be non-innovative firms. To support the identification strategy, we show that exit rates do not capture idiosyncratic unobservable characteristics among innovative firms. In addition, we control for the effect of time-varying credit constraints. We find that a one standard deviation increase in exit rates is associated with reductions of 1.5% in the share of firms investing in innovation. The drop is larger for smaller firms, which also experience greater decreases in sales. Since smaller firms are most sensitive to demand drops, they are the natural candidates to be the target of policies devoted to increasing R&D activities during crises. As additional analysis, we study firms’ perceptions of the main obstacles to innovation to find that net exit rates capture the heterogeneous variation in demand, rather than credit constraints. Finally, when analyzing the exit patterns of firms in the sample, we confirm that the net exit rate in a firm's stratum does not drive the exit of firms in our sample.

Keywords: R&D; Innovation; Firm entry; Firm exit; Great Recession (search for similar items in EconPapers)
JEL-codes: L22 O31 O32 (search for similar items in EconPapers)
Date: 2018
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