While Winston Churchill was famously supposed to have remarked that we should never waste a crisis, the reality is that during recessions, firms often tighten their belts and reduce the amount they invest in innovation.
Of course, Churchill’s dictum rests on the way in which crises can prompt us to reassess that which we had previously taken for granted and look for new ways of doing things. Research from Kellogg explores whether that is really the case or not.
“We examine innovation following the Great Depression using data on a century’s worth of U.S. patents and a difference-in-differences design that exploits regional variation in the crisis severity,” the researchers explain.
Innovation during recessions
The study found that there was a steep decline in inventors’ patents during the depression, with this seemingly driven by reduced levels of funding due to the economic crisis. Bigger firms were generally better equipped to weather this situation, however, and the reduction in competitor’s activity may actually have benefitted them.
In short, while smaller, independent innovators reduced their activity, the activity of larger firms tended to hold steady, with the authors suggesting that perhaps the independent innovators sought more certainty at larger firms.
A similar outcome was seen via Harvard research, which looked at whether individuals wanted to work for startups or bigger firms during the Covid pandemic.
Safer option
The researchers tracked job applicants on the AngelList Talent website, which is a leading platform for startups to hire talent. The analysis revealed a distinct shift in job searchers towards larger companies after the national state of emergency was officially declared by federal officials on the 13th of March.
This flight towards larger firms was especially pronounced among higher-quality and more experienced talent, thus leaving startups with a smaller and lower-quality pool of talent to pick from. It’s a phenomenon that the researchers believe has profound implications.
“[It] means not only that the pool of potential human capital for startup companies began declining when COVID started, but also that the quality of the pool has deteriorated,” they say. “The incumbent [companies], just by nature of having more cash or by being more established, are perceived safer during the crisis, and suddenly have a unique advantage in terms of attracting talent.”
Big company activity
The Kellogg study suggests this partly explains why independent inventors have gone from being a fairly common source of innovation to one that plays a minimal role today. Instead, the majority of innovations today emerge from large companies, where the researchers believe most previously independent innovators have ended up.
They highlight that the traditional narrative has been that innovation has shifted to become far more capital intensive during the 20th century, and this explains why more of it has been done by large organizations rather than independent innovators. While this is undoubtedly true, their findings also highlight that recessions also play a part in prompting innovators to seek the relative safety of larger firms.
While we may hope that this is a temporary shift, the data from the Great Depression showed that the innovation activity by independent inventors fell sharply in the 1930s but didn’t ever really recover again, even when economic circumstances became more benign. This contrasts with the fall in firm activity, which did bounce back again.
What’s more, this fall was noticeable across all technology areas, so the researchers believe they can discount technological trends as a key driving force behind the phenomenon. If this wasn’t the case then ebbs and flows might be expected to coincide with the emergence of different types of technology.
More than just safety
Of course, while the relative safety of big companies is undoubtedly a factor here, the researchers also highlight that things like access to finance also played a part, with independent innovators struggling to access funding during the Depression, with support often sought from wealthy local benefactors, much like angel investors support startups today. Obviously, if those individuals themselves lost money then it makes it less likely they’ll have any spare to help entrepreneurs.
Traditional bank finance also dried up, and while this was across the board, bigger firms had money in the bank to fall back on or earnings from existing products. Perhaps unsurprisingly, the decline was greatest among younger inventors and innovators.
“The Great Depression provides a useful laboratory to study the role of crises in shaping innovation,” the researchers explain. “In fact, our results highlight how crises may act as catalysts for deep changes in the way innovation is organized and conducted.”
A restriction in the flow of capital can result in a fundamental change in the way in which innovation is organized, and the researchers believe this played a major role in the shift from an entrepreneur-led innovation process in the United States to a more firm-led approach.
