Monday, June 22, 2009

Innovation and the Economic Crisis

The OECD has released a new report, Policy Responses to the Economic Crisis: Investing in Innovation for Long Term Growth, which documents the relationship between innovation and economic growth. Specifically, the OECD asks how the recession is likely to affect those factors that are most important for long-term economic growth and development, such as innovation and entrepreneurship.

Not surprisingly, they find that companies are cutting their investments in innovation, such as R&D. Other metrics of innovation, such as venture capital investment, show similar trends. This is in line with historical trends, as innovation expenditure generally tracks GDP growth. The problem, of course, is that innovation is precisely one of the drivers of economic recovery. As more firms slash their budgets for innovation, the more difficult it will be to claw our way out of the recession.

But the picture is not entirely bleak. If history is any guide, economic crisis also spurs innovation, in the sense that inefficient companies go bankrupt and scrappy startups pioneer new business models. It's likely that the seeds of tomorrow's Fortune 500 companies are being planted right now.

The report describes other mechanisms by which the crisis is affecting innovation, such as world trade, human capital, and clean technology. Furthermore, it analyzes the policy responses of individual OECD member countries to the crisis, in terms of the size and focus of their various stimulus packages.

It's an excellent report. Do have a read.

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