ECONOMY Innovation
Innovating a recovery Andrew Wyckoff, OECD Directorate for Science, Technology and Industry
A jolt of innovation can be a powerful antidote to recession. But innovation risks being hit hard by the economic crisis as the capital to finance research and develop new products grows scarce. The economic fallout could be serious, since innovation is a key driver of growth.
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s financial markets collapsed last autumn and economies around the world plunged into recession, many venture capitalists started putting their wallets back in their pockets to wait out the crisis. Instead of funding startups, they are sparing capital to help firms in their portfolio survive. The numbers are cause for concern. US venture investments started declining in early 2008. And in the first quarter of 2009, they plunged 60% compared with the same period a year earlier. In Europe, venture investments declined 40% in the first quarter, and in China, by 58%, according to Dow Jones Venture Source. At many companies, funding for research and development (R&D) is also squeezed by the recession. Those struggling to remain profitable are forced to put risky, long-term R&D projects on hold or curb spending–since R&D tends to be financed from cash flow. Corporate reports for the fourth quarter of 2008 in many cases already show a decline or slower growth in R&D spending. And forecasts for 2009 confirm the trend. A recent survey by McKinsey of almost 500 large businesses worldwide shows 34% expect to spend less on R&D in 2009.
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OECD Observer
No 273 June 2009
And even though some stronger companies reported taking advantage of the recession to outspend weaker rivals and gain competitive edge, available data show that even quarterly R&D expenditures of top information technology firms are dropping in many sub-sectors, notably semiconductors, which were down 14% in the first quarter over a year earlier. Whereas Internet and software firms still have rising year-onyear R&D spending in the first quarter of 2009, growth is down. Why should a contraction in R&D or venture capital outlays matter more than any other nose-dives in this crisis? The answer is simple: this is not your parents’ recession. Productivity gains and GDP growth are strongly linked to new technologies and investment in a wide range of intellectual assets. The advent of personal computers, the world wide web and its offspring, broadband communications networks, all play a key role driving efficiency gains, new business models and new firm creation. R&D is a powerful driver of innovation, but it’s not the only one. Globalisation has changed the way economies
transform knowledge into market value–the definition of innovation. That process now takes place increasingly outside the lab. New approaches to design, marketing and organisations are powerful drivers of growth. Companies can enhance efficiency by investing in new technology, but to reap greater gains they need to take advantage of technology by investing in new skills and approaches too. In our knowledge-based world, investment in these “intangible assets” has become as important as that in traditional plant and equipment, accounting for 5% to 12% of GDP in many OECD countries. Skills, networks and trading knowledge are vital to competing efficiently in today’s economy where information travels in real time. Companies increasingly collaborate to reduce the cost and risk of bringing new ideas to market by tapping expertise around the globe. How can countries improve their ability to innovate? The OECD Innovation Strategy offers a way. With a final report due in 2010, the strategy is being designed to help governments devise policies that keep pace with change. The goal is to unleash greater innovation
