Pandemic effects: Do innovation activities of firms suffer from long-Covid?

The COVID-19 pandemic has affected firms in many economies. Exploiting treatment heterogeneity, we use a difference-in-differences design to causally identify the short-run impact of COVID-19 on innovation spending in 2020 and expected innovation spending in subsequent years. Based on a representative sample of German firms, we find that negatively affected firms substantially reduced innovation expenditure not only in the first year of the pandemic (2020) but also in the two subsequent years, indicating 'Long-Covid' effects on innovation. In 2020, innovation expenditure fell by 4.7 % due to the pandemic. In 2022, innovation spending was even 5.4 % lower compared to the counterfactual scenario without the pandemic. Firms with higher pre-treatment digital capabilities show higher innovation resilience during the pandemic. Moreover, COVID-19 leads to a decrease in innovation spending not only in firms that were strongly negatively affected by the pandemic, but also in those firms that experienced a positive demand shock from the pandemic, presumably to increase production capacity.