Thinking through the role of innovation in times of economic crisis

Results of the INNO-Grips workshop, 30 September 2010, Cologne

Bonn, 5. October 2010

On 30 September 2010, about 30 experts in innovation policy gathered in Cologne in order to discuss whether and how innovation policy can help to recover faster from economic downturns or to soften the impact of the downturn. The workshop was jointly organised by empirica and Institut der deutschen Wirtschaft Köln Consult GmbH in the context of the “INNO-Grips” project, which is part of the European Commission’s PRO INNO Europe portal.

The recent financial and economic crisis has seriously damaged Europe’s economy. Huge debts have been accumulated to fund the rescue of systemically relevant institutions. Genuinely new growth is needed. Theoretically, economic growth can be driven by innovation. In consequence it is frequently argued that strong investment in innovation during economic downturns is the best response, both for immediate relief and as the route to rapid and sustained recovery from the crisis. The Schumpeterian “Creative Destruction”, well-known in economic theory, predicts that during economic downturns innovation can restructure economies: less productive firms are squeezed out, while highly productive firms succeed. As a result, overall productivity levels rise. Finland’s recovery from the crisis of the early 1990s, when the country was on the verge of bankruptcy, is commonly cited as a prime example for the positive effects of innovation policy in an anti-cyclical conjuncture.

Prior to the workshop, as a basis for the discussion, economists from IW Consult Cologne prepared a policy brief which presents evidence on the links between innovation investments and the business cycle. By and large, they are sceptical that anti-cyclical innovation policy is a promising short-term measure that can deliver economic recovery. They recommend that European innovation policy should rather aim to create a positive and interactive environment for innovation, to encourage strong but fair competition, and to provide substantial support for basic research. However, they also point out that targeted anti-cyclical measures can be important in specific areas, in particular to sustain the innovation activities of small and medium-sized enterprises (SMEs) during economically difficult times. Because SMEs are important drivers of innovation, and because innovative activity of SMEs generates disproportionately more jobs than in large firms, they are highly relevant in this context. The study authors recommend, inter alia, tax-privileges for R&D and innovation expenditures, as this provides a degree of legal certainty, making the support very reliable – a key condition for SMEs.

Apart from these specific areas, and acknowledging its longer-term nature, the study recommends a systematic approach for innovation policy, for instance by closely integrating it with education policy, economic and labour policies.

INNO-Grips is part of the European Commission's PRO INNO Europe portal, a major focal point for innovation policy analysis and cooperation in Europe. It supports policy-makers in adopting appropriate responses to emerging innovation needs, trends and phenomena. INNO-Grips is managed by empirica GmbH, Bonn, based on a service contract with the European Commission, DG Enterprise and Industry. The contract runs until the end of 2012.