Do crises boost innovation or is this just a myth?

Do crises boost innovation or is this just a myth

How can we expect that the (coronavirus) crisis will affect innovation output?

What can we learn from the 2008 financial crisis when it comes to innovation?

#Innovation and #crisis

Vinco Innovation Overview

We are in the middle of the coronavirus (Covid-19) outbreak and an economic crisis. Companies and governments around the world are struggling to cope with the new situation and the isolation economy. Despite the high uncertainty, we analyzed the situation and perspectives on innovation.

In this report we look at:

  1. How has Covid-19 impacted industries
  2. 2008 financial crisis impact on innovation?
  3. Persistent innovators and how to act now (ref. Covid-19)

The health systems all over the world are at a stake because of the coronavirus outbreak. In addition to the challenges faced by the health system, people’s health, and loss of life, economies around the globe are severely threatened as well. Many say that adverse circumstances create opportunities and innovation. And that is true. We know that many innovations are a result of challenges and difficult times.

The question here is, however, are these innovations strong enough to compensate for the recession effects?

Do companies’ innovation strategies change as a result of a crisis, and which factors may be influencing these responses? In order to find answers, we have investigated some findings based on the financial crisis of 2008.

How has COVID-19 impacted industries?

The father of innovation and entrepreneurship, Joseph Schumpeter defined creative destruction as a condition when equilibrium is disrupted and hence opens for innovation through dismantling the old and known.

The Covid-19 crisis has disrupted the world beyond what we could have imagined. The outbreak of the Covid-19 virus has dramatically changed society and businesses. Imposed restrictions such as limited gatherings, travel restrictions, hygiene requirements changed customer needs and human behavior. In addition, many are left without a job, and many offices are empty due to imposed working from home requirements.

The Covid-19 new normal:

  • limited or no gatherings allowed
  • travel restrictions and closed borders
  • hygiene requirements
  • protecting vulnerable
  • working from home
  • closed schools
  • distancing from friends and close ones
  • high uncertainty

The healthcare industry together with the hospitality sector, tourism, travel, leisure, and sports industries are hit hard and negatively. Most of the hospitality industry has suddenly become completely paralyzed and left without possible future income for the foreseeable future. The isolation economy is a serious threat to drug production worldwide since most of the producers are dependent on pharmaceutical ingredients from China and India.

The Covid-19 impact on the healthcare sector

Healthcare/Hospitals/Public health sector experienced severe negative consequences of the Covid-19 outbreak. Hospitals struggle with capacity problems. The disease is easily spread, and hospitalized patients need extensive medical care. Many patients in need f other medical treatments are therefore postponed, which eventually builds up the queue in the post coronavirus times. Patients that in non-coronavirus times can act as relatively healthy, for example, asthma or diabetes patients, are suddenly in high-risk categories. Skyrocketing world demand for the medical equipment fighting the coronavirus is giving producers high bargaining power.

However, there are also some positive outcomes in the sector: Many companies, research institutions, and businesses have adapted quickly to the needs and are coming up with new solutions, also switching to producing goods in need (masks, tests, ventilators, etc.). We witness more collaboration between governmental institutions, research, and businesses both within a country and between countries.

Below is a short overview of industries within the tertial sector that are facing the greatest impact.

Overview the coronavirus measures had on most hit industries of tertial sector

Table 1. Overview the coronavirus measures had on most hit industries of tertial sector

Some industries are more adaptable; for example, educators have almost instantly and fully switched to online solutions. Demand for IT remote work/learn/entertain solutions has never been greater.

However, how much innovation will be created as a consequence of the increase or complete loss in demand, for some services, the time will show.

Figure 2. Estimated impact of the corona crisis on some industries of the tertial sector.

 

 

2008 financial crisis impact on innovation

An OECD study from 2012 on the impact of the 2008 financial crisis on innovation rejects the assumption that the downturn ignites innovation (OECD, 2012).

By looking at the number of PCT filings and the number of start-ups, the number shows that the crisis had a negative influence. Patent activity based on the trends in PCT filings declined considerably in 2009 compared to 2007 (OECD, 2012). Moreover, the USA did not reach the pre-crisis numbers even at the time the study was made. (OECD, 2012).

The crisis caused a sharp increase in bankruptcies across Europe. The creative disruption theory suggests that the crisis should have created more new ventures, while in its study (2012) the OECD says that there was a clear decrease in the rate of new companies created. Only a few countries have managed to return to pre-crisis levels since then. In addition, the number and the value of venture capital deals also declined. (OECD, 2012)

Figure 1.  Enterprise creation, quarterly data, 2006-11

Source: OECD, Innovation in the crisis and beyond, 2012

The OECD study (2012) identifies several causes of decreased innovation

The OECD study (2012) identifies several causes to this:

  • Reduced demand for goods and services which negatively affected the cash (in)flows hence fewer resources available to finance innovation projects
  • Reduced liquidity in the financial sector – again reduction in financial resources proved to have a negative impact on innovation-related investments
  • Public budgets were limited again posing constraints to financials to support innovation activities.

However, not all countries, industries, and firms were equally hit. For example, the US was more affected than Europe did. While the medium-technology industry segment (e.g. automobiles) was hit hard, the health sector and software firms increased their R&D investments for 2008/2009. Larger firms more readily accommodated to the shock as thanks to their stronger financial muscle and liquidity than small companies (OECD, 2012).

 

The next post: Persistent innovators and how to act now

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