Firm-level innovation and COVID-19 crisis – The effects and going forward

Ema Talam, PhD Student, Staffordshire Business School


The importance of innovation cannot be overemphasised. Innovation (introduction of new products/services, processes or methods) has been shown to positively affect economic growth, standards of living and our well-being. During the past few months, we have all relied on different innovative products and services to keep our lives as close to normal as possible (think about, for example, all those Zoom quizzes with family and friends or YouTube workout videos). Additionally, innovation will be, as Roper and Turner (2020, p. 504) note, “a critical element of the recovery post-COVID-19”.

The past few months have been very challenging times for firms. As a response to the challenges, were the firms more or less innovative? Equally, as a consequence of the crisis, will they be more or less innovative in the future?

Evidences suggest that large number of firms embraced innovation during the lockdown to keep them in business. However, at the same time, firms have reduced more long-term oriented innovation activities. Riom and Valero (2020) did a survey of 375 UK-based firms and show that: (i) approximately 60% of the surveyed firms introduced new innovations in the form of digital technologies (e.g. remote working technologies) and management practices (e.g. new human resources practices), (ii) almost 40% of firms innovated in the form of digital capabilities (e.g. e-commerce), and (iii) 45% of firms introduced new product innovation. Roper and Vorley (2020) did a survey of 334 firms that received Innovate UK award. Their survey shows that, in the period from April to June 2020, more than 75% of firms have either stopped their research and development (R&D) activities, stopped all non-critical R&D activities, or reduced and reprioritised their R&D activities. However, going forward – what can we expect about firm-level innovation? Firm-level innovation in the United Kingdom decreased during the Global Financial Crisis and its recovery to the pre-crisis levels was slow and unbalanced across different sectors and UK regions (Roper and Turner, 2020). Roper and Vorley’s (2020) survey shows that almost 60% of firms planned to reduce R&D and innovation investments in the three months following their survey.

What are the most common policies for increasing firm-level R&D and innovation?

There are number of policies that policy makers implement to encourage more innovation among firms. Some of the commonly used policies are R&D tax incentives and R&D subsidies. Previous research has shown that both can lead to the desired effect (Castellacci and Lie, 2015; Dimos and Pugh, 2016; Bloom et al., 2019). Unlike R&D tax incentives, R&D subsidies can offer a more targeted support for certain projects that are of interest (Bloom et al., 2019). Riom and Valero’s (2020) survey (discussed above) shows that new tax incentives and business grants or vouchers were chosen by firms to be favourable policies to deal with problems such as financing constraints for innovation for both product and process innovations. Other policies that may positively impact innovation are policies directed at human capital supply (e.g. skilled immigration) or policies boosting competition and trade openness. Additionally, historically, there are evidences that mission-oriented policies, which are focused on a particular mission – certain technologies or sectors – can lead to innovation (Bloom et al., 2019).


References:

Bloom, N., Van Reenen, J., and Williams, H. (2019) ‘A toolkit of policies to promote innovation’, Journal of Economic Perspectives, 33(3), pp. 163-184. doi: 10.1257/jep.33.3.163

Castellacci, F., and Lie, C. (2015) ‘Do the effects of R&D tax credits vary across industries? A meta-regression analysis’, Research Policy, 44(4), pp. 819-832. doi: https://doi.org/10.1016/j.respol.2015.01.010

Dimos, C., and Pugh, G. (2016) ‘The effectiveness of R&D subsidies: A meta-regression analysis of the evaluation literature’, Research Policy, 45(4), pp. 797-815. doi: https://doi.org/10.1016/j.respol.2016.01.002

Riom, C., and Valero, A. (2020) ‘The business response to Covid-19: The CEP-CBI survey on technology adoption’, A CEP Covid-19 Analysis – Paper No. 009. Available at: http://cep.lse.ac.uk/pubs/download/cepcovid-19-009.pdf

Roper, S., and Turner, J. (2020) ‘R&D and innovation after COVID-19: What can we expect? A review of prior research and data trends after the great financial crisis’, International Small Business Journal: Researching Entrepreneurship, 38(6), pp. 504-514. doi: https://doi.org/10.1177/0266242620947946

Roper, S., and Vorley, T. (2020) ‘Assessing the impact of Covid-19 on Innovate UK award holders: Survey and case-study evidence’, ERC Insight Paper – September 2020. Available at: https://www.enterpriseresearch.ac.uk/wp-content/uploads/2020/09/ERC-Insight-Assessing-the-impact-of-Covid-19-on-Innovate-UK-award-holders..pdf

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