Learning to innovate in recessions

Innovating in downturns can affect corporate success because it improves a firm’s position relative to competitors during the recovery period. However, increased uncertainty and more binding financial constraints complicate such innovation activity. I find that past experience with innovation during recessions improves a firm’s ability to invest in R&D when a new downturn hits. This result holds controlling for traditional drivers of innovation as cumulated innovations and financial constraints, as well as using variations of a firm’s financial strength to mitigate endogeneity concerns. Moreover, difference-in-differences results show that past experience with innovation during recessions is beneficial to patent outcomes after a new recession. Overall, this paper provides novel evidence on how business cycles shape innovative capabilities. JEL classification: G30, O32, E32