Innovation in recessions : effects on firm performance

Abstract

This thesis investigates how a firm’s innovation activities affect performance outcomes during recessions. The thesis uses a heteroskedasticity-robust multiple regression model to analyse a large sample of Norwegian firms with innovation data from 2006-2010 and performance data from 2008-2012. Innovation activities both prior to and during the recession and its performance effects were investigated, and provided very surprising results. Contrary to the positive innovation-performance link suggested by existing literature, the results show that innovators consistently underperform non-innovators on profitability measures. The more a firm innovates prior to or during the recession, the greater the underperformance compared to non-innovators. Type of innovation was also found to affect firm performance, though largely exhibiting the same negative performance link. This thesis also includes an attempt to explain this negative innovation-performance link using existing innovation and business cycle theory. In conclusion, this thesis provides an important limitation to the seeming societal and academic perception that innovation is always positive, and provides fertile ground for future research in the fields of strategy, business cycles, and innovation.