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The quality of innovation “Booms” during “Busts”

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  • Makridis, Christos A.
  • McGuire, Erin

Abstract

Models of creative destruction assume that recessions are periods of reallocation and disruption, generating new ideas that catapult new firms to the frontier. However, current empirical evidence suggests that research and development (R&D) expenditures and patenting are procyclical, not countercyclical. In this paper, we introduce new insights to enrich this debate. First, using panel data on the quality of innovation between 1980 and 2019, we document that the quality of innovation is countercyclical: Innovations produced during busts have a larger effect on the path of future research than those developed during booms. Second, we investigate several additional patterns on the composition of R&D. We find that the procyclicality of R&D is concentrated among firms that are more financially constrained, and that time allocated towards basic science (applied) research is countercyclical (procyclical). These results highlight the importance of composition effects among not only the organizations that contribute to innovation over the business cycle, but also the tasks that employees within these organizations perform.

Suggested Citation

  • Makridis, Christos A. & McGuire, Erin, 2023. "The quality of innovation “Booms” during “Busts”," Research Policy, Elsevier, vol. 52(1).
    • Handle: RePEc:eee:respol:v:52:y:2023:i:1:s0048733322001780
    DOI: 10.1016/j.respol.2022.104657
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    More about this item

    Keywords

    Business cycles; Financial constraints; Innovation; Patenting; Research and development;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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