Innovation, employment and the business cycle

Changing economic conditions over the business cycle shape the innovation behavior of firms, which, in turn, affect their ability to generate jobs from new products and processes. Credit constraints, the opportunity cost of investing in innovation, and changing appropriability and demand conditions have been identified in the literature as factors that explain shifts in innovation behavior of firms over the business cycle. Altogether, firms behave pro-cyclical: the majority of firms expand R&D and innovation activities faster in periods of prosperity than in recessions when some firms even reduce these activities. Exceptions, however, are frequent, in particular among fast-growing new firms and highly innovative enterprises. In contrast to innovation input and output, the elasticity of employment growth with respect to innovation over the business cycle is not well researched yet. The few existing studies suggest that the ability to create employment from product innovation is pro-cyclical as well. This seems a promising field for future analyses.