Innovative Firms Are More Resilient to the COVID-19 Crisis


Research and Development in Companies

The ZEW study shows that companies in Germany reduced their innovation activities less than anticipated.

During the coronavirus pandemic, companies in Germany reduced their innovation activities less than anticipated. This is shown by a recent study by ZEW Mannheim on behalf of the Federal Ministry of Education and Research. German companies that participated in the ZEW Innovation Survey from March to July 2020 planned to cut their innovation spending by an average of about two per cent in 2020. “By comparison, during the 2009 financial crisis, companies lowered their innovation spending much more drastically, by an average of eleven per cent,” says ZEW researcher and co-author of the survey, Josefine Diekhof, PhD.

However, investments in research and development (R&D), which are part of innovation expenditure, vary considerably depending on the individual sector. While many companies in the pharmaceutical industry and ICT service providers (including software programming) intended to increase investments in R&D significantly, companies in the chemical, electronics and automotive industries aimed to maintain their R&D spending on a stable level. In mechanical engineering, engineering, and vehicle construction, companies planned to slightly lower R&D expenses by four to six per cent. “The sectors that sought a significant reduction in R&D spending tend to play a minor role in national innovation activity,” explains Dr. Christian Rammer, researcher at the ZEW Research Department “Economics of Innovation and Industrial Dynamics” and co-author of the survey.

During the coronavirus crisis, highly innovative companies have proven to be quite resilient to the negative consequences of the pandemic. They sped up the digitalisation of internal processes and products, tried to conquer new markets and to attract new customers, and introduced new products and processes. These are all actions that help a company grow. “Furthermore, these measures are not implemented for a short period of time but rather permanently, which will strengthen businesses’ competitiveness for the years to come,” says Bastian Krieger, ZEW researcher and co-author of the survey. Non-innovative companies, on the other hand, hardly took any strategic measures in response to the coronavirus crisis.

Companies reorganise their innovation activities in the COVID-19 pandemic

The COVID-19 pandemic has prompted companies to reorganise their innovation activities. Many investments in innovation activity were postponed or the periods of ongoing innovation projects were extended. On the other hand, some projects that were already running had to be discontinued. Although new projects for product and process innovations were launched in the crisis year, fewer projects were started overall – partly due to a lack of impetus from personal interactions. It seems that in the pandemic, companies have focused rather on short-term innovation projects while the more basic research-oriented projects have been extended or postponed.

This results do give cause for hope that German companies will quickly return to a path towards growth in R&D and innovation. “Still, decision-makers in politics need to consider the possibility that the COVID-19 pandemic might widen the existing gap between the small group of innovative companies and the larger group of companies with little or no innovation activity,” says Josefine Diekhof, PhD. To offset this effect, policymakers should provide stronger incentives for innovation-weak firms to increase their innovation spending, such as by providing greater R&D tax incentives. At the same time, further impetus is needed to start new R&D initiatives, especially those that advance new technologies and that could contribute to combating climate change, for example.