R&D and firm resilience during bad times

• Examines if innovation helps firms shield themselves against recessions • Finds that firms with prior R&D investment performed relatively better during the Great Recession than non-innovative firms in severely affected industries. • Attributes resilience to increased product innovation, not process innovation. • Propensity score matching and machine learning tools support the finding. • Shows R&D investment enables firms to adapt to drastically changed external environments. Can being innovative help firms to shield themselves from the disruptive effects of a recession? Using data for Spanish manufacturing firms, this paper finds that in industries hit severely by the Great Recession, firms with prior investment in R&D performed relatively better than non-innovative firms during the recession. The resilience of innovative firms is explained by their ability to promptly introduce product innovations. These firms do not seem to engage in process innovation to lower costs or improve production efficiency to adapt to a negative demand shock. Consequently, being innovative matters most for resilience in industries with a high scope for product differentiation. Matching innovative and non-innovative firms within industry groups along several firm characteristics and their pre-recession growth trajectory, and controlling for firm financing constraints, product-market scope, differences in labour adjustment costs or management quality supports the findings. The paper, thus, provides evidence for how investment in R&D today helps firms to cope with a dramatically changed external environment.