Learning Before and After the Global Crisis: Firm-level Innovation in Latin America

Economic shocks of the kind we recently witnessed with the 2008 global financial and economic crisis do not come around very often but when they do, their effect can be catastrophic, not the least because of their impact on businesses. Existing theories of how firms react to crises such as these are ambiguous and very little empirical evidence exist, particularly for the developing world. As such, our main contribution to the literature is to shed light on these issues, articulating a theoretical framework and testing it using three waves of cross-country innovation identifying survey implemented by the World Bank in Latin American economies. The three waves coincide with a timespan that covers before, during, and after the global crises. Our results provide strong support that firms alter their practices and witness different profit outcomes before and after a downturn depending on innovation decisions. In fact, we find evidence that indicates that the profitability gains from new products for firms may be higher during downturns.