Cycles and innovation

This paper explores the way economic cycles influence the relationship between innovation and growth. A large literature has investigated this link in the long waves of development,focusing on the emergence of radical innovations and new technological paradigms; a parallel stream of research has examined differences in sectoral patterns of innovation and in industries? technological regimes, emphasising their stability and persistence over time. We build on these approaches and we investigate whether the ups and downs of cycles, with changes in demand dynamics, alter the possibility to exploit the technological opportunities of sectors. Within industries? innovative efforts, we identify on the one hand efforts based on R&D expenditure, focusing on new products and aiming at technological competitiveness and, on the other hand, investment in innovative machinery focusing on new processes and aiming at cost competitiveness.A model that explains sectoral growth in value added by combining technological and demand factors is proposed. The empirical test is based on data for six major European countries Germany, France, Italy, the UK, the Netherlands and Spain - at the level of 20 manufacturing sectors. Two upswings are considered - 1996-2000 and 2003-2007 ? and their patterns are contrasted with that emerging from the downswing of 2000-2003. Results show that in upswings faster economic (and productivity) growth in industries is sustained by efforts to develop new products, while in downswings, due to a shortage of demand, process innovations aiming at restructuring result more relevant in supporting the increase in value added (or in containing its fall).