Firm‐level impact of the global financial crisis: Evidence on innovation from Latin America

The long‐term effects of the 2007–2009 Global Financial Crisis on Latin American economies depend on how firms altered their innovation activities in response to this and similar financially initiated shocks. We develop and test a novel theoretical framework that analyses the return to innovation for firms that survived this crisis in Latin America. We use detailed firm‐level data that allows us to understand how firms reacted to the crisis and their subsequent outcomes post‐crisis. We show, subsequent to several robustness checks, that: (i) product and process innovation are strongly correlated with each other over the business cycle; and (ii) although the return to innovation is positive (independent of the business cycle), the return to product innovation may be greater during recessionary periods.