Innovation During Economic Contractions: An Examination of the Barriers to Counter-cyclical Innovation

Rasmus Gebauer Josefsen

Student thesis: Master thesis


When the business cycle turns to recession both firms, society and individuals suffer economic losses. However, recessions can constitute an opportunity for firms to innovate at a lower cost than during expansions – i.e. counter-cyclically. Based on empirical observations that especially firms in weak appropriability regimes tend to innovate pro-cyclically I examine how these firms can attempt to reduce their pro-cyclical innovation investment. Through an analysis based in the Equity Ratio management philosophy by Andersen (1997) I examine the relationship between the firm’s equity ratio and the pro-cyclical innovation pattern and suggest how this relationship can aide in foster counter-cyclical innovation. The Profiting From Innovation Framework is used as a theoretical basis for providing suggested solutions to the problems faced by weak appropriability. The suggestions are analysed within the competitive advantage frameworks of the Resource-Based View and the Relational-View. Finally, regression analysis is performed to empirically test the relationship between the firms Equity Ratio and R&D intensity, and how this relationship is mediated by weak appropriability. The key findings are that the issues of weak appropriability and pro-cyclical innovation investment are intimately linked in such a way that a solution need to take the entirety of the business cycle into account. By adopting the equity ratio as the guiding principle for the economic goal structure of the firm, resources can be secured that allow the firm to invest in improving appropriability, thereby fostering counter cyclical-innovation. There is an explanatory relationship between ER and R&D intensity in some industries, but the relationship is not the same in all of them. When the strength of the appropriability regime is included in the analysis, the explanatory relationship increase dramatically, indicating that for firms in weak appropriabiliy regimes there can be a real benefit from improving their equity ratio through adoption the Equity Ratio Management practice.

EducationsMSc in Management of Innovation and Business Development, (Graduate Programme) Final Thesis
Publication date2018
Number of pages92
SupervisorsHenrik Johannsen Duus