Pandemic Effects: Do Innovation Activities of Firms Suffer from Long-COVID?

The COVID-19 pandemic exogenously hit many economies early 2020. Exploiting treatment heterogeneity, we use a conditional difference-in-differences design to causally identify how COVID-19 impacted firms' innovation spending in the short and medium term. Based on a representative sample of German firms, we find that firms that were strongly negatively treated by COVID-19 substantially reduced innovation spending not only in the first year of the pandemic (2020) but also in the two subsequent years, indicating Long-Covid effects on innovation. Firms with higher pre-treatment digital capabilities showed higher innovation resilience during the pandemic. Moreover, COVID-19 also led to a decrease in innovation spending in those firms that were positively treated by COVID-19 through an unexpected  positive demand shock, presumably to increase production capacity. Overall, these short and medium-term innovation reactions have a substantial repercussion on the macro level. In 2020, innovation expenditure fell by 4.7% due to COVID-19. In 2022, innovation spending was even 5.4% lower compared to the counterfactual scenario without the pandemic.

Trunschke, Markus, Bettina Peters, Dirk Czarnitzki und Christian Rammer (forthcoming), Pandemic Effects: Do Innovation Activities of Firms Suffer from Long-COVID?, Research Policy