Who innovates during a crisis? Evidence from small businesses in the COVID-19 pandemic

The first months of the COVID-19 crisis offer the possibility to observe patterns of innovation in response to a large, unanticipated shock, simultaneously creating severe adversity and new opportunities. Using new survey data on 22,102 small businesses, we study the amounts, types, and determinants of innovation, particularly firm age, size, factor adjustment, and prior capabilities. Results imply high rates of innovation during the pandemic, including new products, processes, and modes of delivery. Regressions show that rates are higher for younger and larger firms, where younger firms show a greater propensity for product innovations and larger firms for process innovations. Innovation is higher for firms that adjust factors (employment) less. Firms with either extensive or zero pre-pandemic capabilities to accommodate social distancing innovated the least in directions that would expand this capability, while firms with some prior capability innovated the most to expand upon process innovations related to social distancing. Young firms are more likely to increase E-sales, while large firms are more likely to adjust the share of teleworkers.