Innovation and the credit crunch

26 August 2011

By Andy Cosh

How are innovative small and medium-sized firms coping during the prolonged downturn? Anecdotes abound but good evidence is hard to find - but two studies from the ESRC-funded UK Innovation Research Centre provide important insights. The first study at the start of the current recession found that the retreat from risk that accompanied the credit crunch created difficulties for innovative firms, but they may be showing more resilience than in the past. The second study about smaller companies' open innovation practices suggests that smaller firms may benefit from openness, but cautions SMEs about some drawbacks.

The first study, SME finance and innovation in the current economic crisis (PDF, 796Kb), returned in November 2008 to a panel of firms previously surveyed in 2004 so that direct comparisons could be made with their situation prior to the credit crunch. Although the recession was initiated by a credit crisis, the firms had become much more concerned about demand for their goods and services – 81 per cent of them saw this as a significant or crucial constraint compared with 63 per cent in 2004. Consistent with this, the proportion seeking to grow over the following three years fell from 80 per cent to 59 per cent.

Innovation graph 1: Comparison of present recession with 1988-1994 - inflation and unemploymentFinance was also a problem for those seeking to raise funds, but the proportion of firms seeking new finance in the previous year fell from 35 per cent in 2004 to only 16 per cent in 2008. Despite this reduction in funds sought, the average percentage obtained fell from 78 per cent to 55 per cent.

The report also compared the recession that started to bite at the end of 1990 with the recent recession that took hold in the second half of 2008. The figure to the right compares 1988-94, including the period before and after the recession, with what has happened in the period surrounding the credit crunch recession.

It shows some key differences. For example, in the earlier recession inflation was initially at a much higher level but then fell over an extended time; but in the present recession, the initial drop in inflation was rapidly followed by a rise to an uncomfortable level where it has stayed. On the brighter side, the level of unemployment has not, so far at least, risen for as long, or by as much, as it did in the early 1990s.

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