R&D and innovation after COVID-19: What can we expect? A review of prior research and data trends after the great financial crisis

Abstract

How did the great financial crisis (GFC) of 2008–2010 impact on R&D and innovation in the United Kingdom and internationally? What can we learn about the likely innovation effects of the COVID-19 crisis on small and medium enterprises (SME) innovation? Numerous international studies suggest the strong procyclicality of R&D and innovation investments in firms: investment rises in recovery and falls sharply in times of crisis. This procyclicality is driven in firms by both internal financial resources or slack and varying market incentives for innovation. Cash constraints, in particular, may impact most strongly on R&D and innovation investments by smaller firms. In the United Kingdom, the proportion of innovating firms fell by around a third during the GFC and took around four to six years to recover. Recovery was also uneven – notably weaker in some sectors and regions. The COVID-19 crisis seems likely to leave many firms financially weaker, with the most significant impacts on the willingness or ability of SMEs to sustain R&D and innovation. Where firms are able to sustain these investments, however, the evidence from the GFC suggests that they will lead to better survival chances, stronger growth and higher profitability. Some additional financial support for innovation has been announced by the UK government. Whether this will be sufficient to sustain SME levels of innovative activity, however, remains to be seen.