Innovation & Design

Innovate Out of the Economic Downturn


A crisis is precisely the time for governments to boost spending on innovation, not cut it. Otherwise, nations will find themselves playing catch-up

The Austrian economist Josef Schumpeter once declared that economic downturns are "a good cold shower for the economic system." Economic downturns can have positive effects; they force companies to increase their efficiency, cut waste, and strive to do things in smarter ways.

All companies have to cut costs, and deciding what should stay and what should go is the first challenge that faces them. One of the early victims of downsizing is often spending on innovation activities such as R&D, training, or education budgets. Long-term projects are shelved, hiring is frozen, and workers are made redundant. Worse, risk capital evaporates. Unfortunately, this is akin to patients deciding to reduce expenditure by not spending money on medication (as, indeed, has been reported recently).

During economic downturns, innovation is the single most important condition for transforming the crisis into an opportunity. And while many businesses simply won't be able to afford further investment in innovation, governments should recognize that innovation systems, with all their academic, industrial, and public components, are strategic national assets that need to be protected, just like the financial and housing sectors. Times such as these call for government intervention to prevent the contraction of the knowledge bases upon which economies are now more than ever dependent.

In the short term, governments need to provide support to small companies to help them manage the crisis and continue to develop their portfolios of products and services. The British Innovation Advisory Services model, where government-supported consultants are paid for and loaned to companies, is one example of the type of thing that governments can do. Another is the Dutch voucher system, under which the government gives vouchers to small companies, allowing them to source the expertise (mostly consultants) they need from public research institutes. Some 80% of such voucher-supported projects otherwise would not have been undertaken. This type of support is critical to help many small, successful companies get through the crisis.

For the long term, governments should do four things so their countries can emerge from this crisis as winners:

Inject capital. Inject new funds to fill the gap in any serious downfall in private investment in strategic science and technology (S&T) areas such as nanotechnology, alternative energy, health and life sciences. This is what the South Korean government did when the country was hit by a major economic crisis in the late 1990s. Two years later spending on R&D exceeded pre-crisis levels, and Korean businesses did not have to play catch-up when the economy bounced back.

Think Global. Encourage leverage of international investments in S&T programmes from nations and regions that have the cash such as China, the Gulf, and Japan. The Japanese are looking to expand globally, the Chinese are hungry for knowledge transfer, and more recently, small, rich Gulf countries have allocated billions of dollars to spend on science, technology, and learning programs. Expensive long-term S&T programs can become new platforms for multilateral collaboration.

Focus on Public Programs. Maintain and expand levels of funding for public S&T programs. This should help keep a country's knowledge base expanding. When Finland was hit by a massive economic crisis in 1990, after the collapse of its main trade partner, the Soviet Union, its government's expenditure on R&D and education in all sectors increased. Ten years later, Finland emerged as one of the most competitive and innovative countries in the world. In Sweden, a major economic crisis in the early and mid-1990s saw the number of people engaged in R&D activities increase by about 20%. Swedish businesses emerged from the crisis with global leadership in sectors such as telecom and machinery.

Support Talent. Governments should create big seed capital funds to support the newly created army of potential entrepreneurs composed of highly skilled people made recently redundant in specific sectors.

This crisis might decide the fate of economic systems of many countries for decades to come. Not all have the capacity and resources to come out as winners. These are times for forging ahead—and no time for retreat.

Sami Mahroum is a Research Director of Britain's National Endowment for Science, Technology the Arts and a Visiting Reader at the School of Management, Birkbeck College, University of London.

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