R&D in boom and boost : evidence from the World Bank Financial Crisis Survey

The full implications of the global financial crisis of 2008-2009 are yet to be revealed. The crucial question is whether a crisis of such severe magnitude will set "cleansing mechanisms" into motion as suggested by the opportunity cost argument of R&D, or rather destroy the long-term productivity enhancing incentives? The World Bank Financial Crisis Survey collects direct self-reported measures of firms' credit frictions and R&D during 2009-2010 from six countries: Bulgaria, Latvia, Lithuania, Hungary, Romania and Turkey. Employing this dataset, we seek evidence of how the firms' R&D responded to the negative demand shock and credit contraction at the time of the crisis. Looking at two distinct episodes, the sustained economic growth in 2001-2007 and the sudden slump in 2009-2010, we observe a paradigm shift in firms' R&D decisions: whilst the R&D is counter-cyclical during the pre-crisis period, a pro-cyclical pattern emerges during the crisis