Innovation and Learning During the Crisis: Evidence from Firm Level Data for Eastern European Countries

Paulo Correa (The World Bank)
Mariana Iootty (The World Bank)

Abstract: The “creative destruction” process, intensified during economic downturns, is an important driver of productivity growth. The current downturn, however, due to its synchronized nature and association with a deep financial crisis, is unusually severe. Could this “Great Recession” adversely affect firms which could lead productivity growth in a context of normal business cycle? In this paper, we focus our analysis on the impact of the crisis on innovation and learning, two important sources of productivity growth. We apply panel data estimators and Juhn-Murphy Pierce decomposition technique to a unique firm-level dataset – composed by information from 3,363 firms in seven countries (Bulgaria, Hungary, Kazakhstan, Latvia, Lithuania, Romania, and Turkey) – for 2007, June 2009, January 2010 and June 2010 – in order to investigate the differential impact of the global economic crisis on sales performance of innovative (vs. no-innovative) and young (vs. older) firms in Eastern European countries. We found that the decline in sales growth of innovative and young firms was significantly larger when compared to no-innovative and older companies, respectively, even when controlling for different idiosyncratic firm characteristics, including financial conditions. These results were robust to the estimator applied. We also found that the premium for innovation and the ability of young firms to learn became increasingly negative during the crisis, suggesting that neither factors played a relevant role in innovative and young firms survival in those countries. We interpret these results as evidence that the crisis may not have a productivity-enhancing (“purgative”) effect as other periods of economic downturn.

Download the paper