The Effect of Financial Crisis on the Relation between Patent Applications and Firm Performance: The Case of Japan

Previous research has shown that a financial crisis can adversely affect corporate innovation, as measured by the number of patent applications. This study examines the relation between the number of patents filed and the operating performance and market valuation after the Global Financial Crisis in 2008. The results show that, consistent with previous studies, the number of patent applications in Japan drops drastically at the onset of the Global Financial Crisis. More importantly, the results also show that, even after the Global Financial Crisis, there is a positive relation between the number of patents filed and firm performance up to two years after the filing dates. In addition, the positive relation after the Global Financial Crisis is also much stronger than the one before the crisis. The findings are robust with respect to both operating and market performance. It is concluded that a financial crisis could potentially be beneficial if firms can adapt and shift the focus to the quality of innovation.