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Demand Drops and Innovation Investments: Evidence from the Great Recession in Spain

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  • Alex Armand
  • Pedro Mendi

Abstract

Decreases in aggregate demand can influence the decision to invest in innovation. This paper focuses on this choice when reductions are heterogeneous across productive strata of the economy. To guide the empirical analysis, we model heterogeneous firmsÕ decisions to invest in innovation. In our framework, firms are heterogeneous and demand shocks are exogenous. We show that drops in aggregate expenditure reduce the proportion of firms investing in innovation. We then study investment behaviour in a panel of Spanish innovative manufacturing firms. These firms are all investing in internal R&D in 2004 and are yearly surveyed until 2013. During the Great Recession, firms experienced large contractions in aggregate consumption, up to 10% of its pre-crisis trend. We proxy heterogeneous variation in demand with entry and exit rates in the productive stratum of each firm. Rates incorporate all firms in the stratum, including non-innovative firms. To support our identification strategy, we show that these rates are not capturing idiosyncratic unobservable characteristics among innovative firms. Higher exit rates are associated with reductions of 2 to 3% in the share of firms investing in innovation. The drop is larger for smaller firms, which also experience larger decreases in sales. These results are in line with our theoretical predictions. Our estimates are robust to the inclusion of indicators of time-varying credit constraints. For these constraints, we observe a marginal role among innovative firms.

Suggested Citation

  • Alex Armand & Pedro Mendi, 2017. "Demand Drops and Innovation Investments: Evidence from the Great Recession in Spain," NCID Working Papers 02/2017, Navarra Center for International Development, University of Navarra.
  • Handle: RePEc:nva:unnvaa:wp02-2017
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    More about this item

    Keywords

    R&D; Innovation; Firm entry; Great Recession;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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