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Do recessions slow technology growth? Evidence from the firm level

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  • Elfsbacka Schmöller, Michaela
  • Goldfayn-Frank, Olga
  • Schmidt, Tobias

Abstract

Do recessions harm investment in technology and thus future aggregate supply? We provide novel evidence on this question using unique, granular data on innovation investment in R&D and diffusion from a representative survey of German firms. Our data allows to identify the crisis-induced innovation investment cuts with mean conditional reductions of -65% (R&D) and -70% (diffusion) relative to pre-crisis investment plans, concentrated in 20% and 25% of firms respectively. We estimate that a 1% cyclical output drop translates into a -0.3% fall in innovation investment. Firm-level financial constraints amplify the innovation reductions. Our findings suggest that short-term shocks affect aggregate supply over at least the medium term, challenging the exogenous technology assumption and the resulting dichotomy between business cycles and long-run growth in standard models of aggregate fluctuations. We show that demand shocks are among the main causes of the cyclical technology investment cuts, supporting the view that demand shocks can manifest as technology shocks. We formalize our micro-level results in a New Keynesian model with endogenous growth through investment in R&D and technological diffusion which determines cycle and trend jointly in general equilibrium.

Suggested Citation

  • Elfsbacka Schmöller, Michaela & Goldfayn-Frank, Olga & Schmidt, Tobias, 2024. "Do recessions slow technology growth? Evidence from the firm level," Bank of Finland Research Discussion Papers 15/2024, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:309422
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    More about this item

    Keywords

    Business Cycle Persistence; Innovation; Endogenous Growth; Demand Shocks; Financial Frictions;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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