Innovation UK > News > Innovation UK Vol5-2 > Innovating in the economic crisis

Innovation is difficult at the best of times and, as any business person knows, these are definitely not the best of times. The recent economic crisis has reshaped the business climate worldwide and placed new constraints on enterprises seeking to innovate.

Research and related investments are an easy target in a downturn as the capital to finance them grows scarce. Faced by the credit restrictions biting in the financial sector, enterprises may put off plans to develop and launch a new product or service. Falling demand can force companies to lay off personnel involved in R&D or product design, which are viewed as ?non-essential? from a shortterm ?crisis response? perspective. Recruitment can be curtailed, especially for young science and technology graduates. Contract research budgets can be slashed and plans to commission outside research put on ice. Budgets related to protecting IP portfolios can also be cut back.

To what extent is this actually happening? The answer is we don?t know. The decisions of Europe?s 30 million businesses ? mainly SMEs ? on such matters take time to feed through into the official statistics on which most innovation indicators are based. The much-respected European Innovation Scoreboard (EIS), for instance, typically relies on data that is around 12-18 months old. So it will be a little while before we know what the true picture is.

Batoning down the hatches

Surveys show that companies are certainly preparing for the worst. According to the 2009 Innobarometer study ? a firm-level innovation survey that was undertaken across the EU ? only one in eight (12%) of enterprises interviewed in early 2009 anticipated a boost in their innovation budgets this year. Furthermore, 28% of managers thought that their 2009 innovation budget would shrink, whereas only 9% had experienced cuts between 2006 and 2008 while one-third reported increased spending on innovation over this period. However, half of enterprises (51%) expected to maintain their current spending in 2009.

A decrease in spending was viewed as most likely in the low-tech/medium-low-tech manufacturing sector (14%), in the largest enterprise segment (13%), and in countries classified as ?catching-up? (13%) according to the 2008 EIS classification.

When asked about the direct effects of the current economic downturn, most enterprises did not report any particular change in innovation expenditure during the past six months (59%). However, of those who reported a change, roughly twice as many companies indicated that they had cut back on innovation-related spending (22%) compared to those who had increased their budget (9%).

High-tech manufacturing firms were the most ?forwardlooking?, with 13% saying they would increase innovation expenditure in response to the economic downturn. But this segment was also ? although marginally ? the most likely to have cut their innovation budgets (24%). A recent report by the OECD, based on actual corporate results, suggests research and innovation are indeed being hit hard by the downturn, with R&D spending declining in many cases. US venture capital investments plunged 60% in the first quarter of 2009 and the same is true in Europe and in China. Patent applications are also down. Incentives to develop a greener economy have also been weakened by the crisis, the OECD says. This shift repeats the pattern seen in previous downturns when business R&D spending and patent filings also fell in line with GDP.

Starting in October 2009, the OECD will publish a ?Crisis Scoreboard? to track the impact of the crisis on innovation. It will include a series of monthly and quarterly indicators and it will be updated regularly on the OECD website.

Building for the future

But the outlook is not all doom and gloom. Indeed, historically, economic crises have been times of industrial renewal. Faced with falling demand for their current products, certain entrepreneurs may seek to innovate more, while others may see opportunities emerging from ?creative destruction? even as recession bites.

Governments, too, are seeing the crisis as an opportunity to invest rather than retrench. Hence, innovation-related stimulus measures have been a key feature of many of the economic recovery packages announced by governments around the world, including in Europe. They aim to follow the examples of Finland in the early 1990s and Korea in the early 2000s, where governments increased investment in R&D and came out with more competitive and innovative economies as a result.

One of the areas targeted as helping to prepare the way for future growth is green technologies. In the EU, the Commission is banking on a ?green recovery?, with clean and renewable energy projects accounting for around 70% of Europe?s 5bn Economic Recovery Plan. A total of 3.5bn is proposed for projects to improve energy security, create a greener energy infrastructure, and accelerate the shift to a low-carbon economy. High-speed communications networks fit for the 21st century are another priority. Broadband boosts productivity across industry and commerce and enables social innovation too. It is crucial to ?smart? energy-saving electricity grids, smart buildings and smart transport systems that will underpin a greener economy. In Europe, the Commission is targeting 1bn to extend and upgrade communications networks, concentrating on rural areas that face particular difficulties linking up to broadband. The goal is to achieve a full 100% high-speed internet coverage by 2010.

Towards total innovation

Once the upturn does come, we?re unlikely to see a return to business as usual. The crisis has changed attitudes, as well as budgets, and brought the realisation ? both in companies and in government ? that they have to invest their money wisely. Organisations will expect more from their innovation efforts in future.

Innovation policy will increasingly need to be addressed at a societal level, for instance bringing about major change in how people live, work and shop (mobility, housing, land use, etc). Indeed, a recent paper from NESTA suggests that the best response to the global challenges facing EU economies is a ?total innovation strategy?. According to NESTA?s Charlie Leadbeater: ?The biggest gains for society will be found in those sectors that both offer the most immediate growth potential, drawing on?existing strengths, and help meet long-term challenges: green energy, environmental services, biotechnology, and services for an ageing society. These need to form part of an economic strategy able to set longterm goals, and with the political credibility to help deliver them.?

A total innovation strategy, as advocated by NESTA, needs to draw together public and private, social and commercial innovation, and entrepreneurship to search for new markets and opportunities. In this way, the global downturn and climate change could create a new platform for growth ? one where business entrepreneurs emerge to take opportunities in new growth industries and social entrepreneurs address emerging social challenges. Europe is thinking along similar lines. Over recent years the Commission and national governments have sought to shift the focus in innovation policy from direct public funding of enterprises (state aid) to demanddriven actions.

These include partnerships of public and private stakeholders seeking to boost demand for innovation (for example, pre-commercial public procurement, green public procurement, and so on) and promoting ?lead markets? in emerging fields. Clearly, still more needs to be done to shift resources towards these new emerging opportunities and demanddriven policies that tackle ?system failures? rather than short-term reactions to long-term structural shifts. If we can succeed here and come out with a more competitive and sustainable economy as a result, then the pain of the current downturn will not have been in vain.