How innovation changes during a recession | So Good News

While Winston Churchill may have said that a crisis should never be wasted, the reality is that during a recession, firms tighten their belts and reduce the amount they invest in innovation.

Of course, Churchill’s dictum is based on the way that crises force us to reassess what we previously took for granted and to seek new ways of doing things. Kellogg research examines whether this is indeed the case.

“We examine post-Great Depression innovation using century-old U.S. patent data and a difference-in-differences design that exploits regional variation in the severity of the crisis,” the researchers explain.

Innovation during recessions

The study found a sharp decline in inventor patents during the Depression, which is due to lower funding levels due to the economic crisis. Larger firms are usually better equipped to deal with this situation, but they may have benefited from reduced activity by competitors.

In short, while smaller, independent innovators decreased their activity, the activity of large firms remained stable, suggesting that independent innovators may have sought more certainty than large firms.

“It’s common knowledge that it’s more expensive to be innovative today, but that’s good in good times because access to capital is easy, so smaller firms can still innovate successfully,” says Anthony Durkach, CEO of Nasdaq-listed FSD Pharma. “This usually doesn’t happen in a downturn because investors and lenders tend to prioritize safety, favoring larger firms with a proven track record and revenue.”

A similar result was observed by Harvard research, which looked at whether people wanted to work at startups or large firms during the Covid pandemic.

Safe option

The researchers tracked job applicants on the website AngelList Talent, a leading talent recruiting platform for startups. The analysis found that job seekers shifted to larger companies after federal officials officially declared a national emergency on March 13.

This flight toward large firms has been particularly pronounced among high-quality and experienced talent, leaving startups with a smaller and poorer pool of talent to choose from. This is a phenomenon that researchers believe has profound implications.

“[It] “This means not only that the pool of potential human capital for start-up companies starts to shrink when COVID starts, but also that the quality of the pool deteriorates,” they say. “The current president [companies]By nature, having more cash or being more stable is considered safer during a crisis and suddenly has a unique advantage in terms of attracting talent.”

Activity of a large company

Kellogg’s research partly explains why these independent inventors have gone from being a simple source of innovation to playing a minimal role today. Instead, most innovation today comes from large companies, where researchers believe that most independent innovators in the past have ended up.

They argue that the traditional narrative suggests that innovation has become more capital-intensive in the 20th century, explaining that much of it was done by large organizations rather than independent innovators. While this is certainly true, their findings also suggest that recessions play a role in prompting innovators to seek the relative safety of large firms.

Although we hope this is a temporary change, data from the Great Depression show that the innovative activity of independent inventors declined sharply in the 1930s, but did not recover even when economic conditions were much better. This is in contrast to the sharp decline in activity that rebounded.

Moreover, this fall was observed in all technological fields, so researchers believe that technological trends can be reduced as the main driving force of the phenomenon. If this is not the case, then flows and flows may coincide with the emergence of different types of technology.

More than security

Of course, while the relative safety of large companies is undoubtedly a factor here, researchers note that things like access to finance also played a role, with independent innovators struggling to access funding during the Depression and often seeking support from wealthy local benefactors. , angel investors support startups today. Obviously, if these people lose money, it reduces their ability to help entrepreneurs.

“People don’t necessarily think there’s stability in a company like ours, because risk and uncertainty are never ruled out, but people seem to want a less risky future,” Stuart Aird, director of talent at regtech company Encompass Corporation. said recently. “We’re not a risk-averse start-up, but we’re not a big firm that makes it hard to make an impact from an innovation perspective,” we hope.

The ability to get things done is what drives many entrepreneurs and innovators, but it’s equally important for companies to treat entrepreneurs positively. As I pointed out in a recent article, founders can often be viewed negatively because hiring managers believe that entrepreneurial drive will never go away and that they will soon turn away from starting a new business again.

Traditional bank finance also dried up, and when it did otherwise, the big firms had cash back in the bank or revenue from existing products. Not surprisingly, the decline is greatest among young inventors and innovators.

“You have to have an open mind about what people can bring to the organization,” says Joanna Corey, head of people at Encompass. “We’ve hired such a wide range of people over the last few years, and you have to look at what people bring to the organization and what impact they can have.”

Changing innovation

With a recession that seems inevitable across the developed world next year, it will be interesting to see not only its impact on innovation more broadly, but also which businesses will actually innovate. History gives us a useful guide to how things might have happened.

“The Great Depression provides a useful laboratory for studying the role of crises in shaping innovation,” Kellogg researchers explain. “In fact, our results show how crises act as catalysts for profound changes in the way innovation is organized and driven.”

A restriction on the flow of capital can lead to a fundamental change in the way innovation is organized, and researchers believe it has played a major role in the shift from an entrepreneur-led innovation process to a more firm one in the United States. guided approach. Will it be the same today? Time will tell.