In an article published this week (in German only), Bernhard Dachs from the Austrian Institute for Technology and Bettina Peters from the Zentrum fur Europaische Wirtschaft (ZEW) make the case for investing in innovation as a means for recovery.

Past crises show that pro-cyclical companies tend to reduce their R&D during a recession. Main reasons are uncertainties for the future and a doubt whether new and innovative products will be in demand during and just after a crisis.

However, the companies that see the crisis as an opportunity increase their spending in innovation (about one third of the German companies increased their innovation spending during the financial crisis in 2008/09). They see that current crisis forces many companies to develop new solutions.

It may not be as easy as it sounds, the researchers warn for potential innovation barriers as lack of access to laboratories and engineering facilities, and uncertainty plays a major role.

The message to policy makers is clear however: studies show that during a recession, innovative companies cut significantly less employment than companies without innovation. The aim of research and innovation policy during the crisis must therefore be to prevent companies from discontinuing their innovation activities. Direct and indirect financing instruments can help, to overcome liquidity bottlenecks for innovation projects, especially for small and medium-sized enterprises (SMEs), and to stabilise future expectations.