NEW YORK – Innovation is at an all-time high, but the economic damage from the COVID-19 outbreak has the potential to stifle inventions and patents. But new research shows that financial crises are both destructive and creative forces for innovation.
Through analysis of the Great Depression, Columbia Business School’s Assistant Professor of Business Tania Babina, University of Colorado Boulder Leeds School of Business Professor Asaf Bernstein, and Filippo Mezzanotti, the Assistant Professor of Finance Northwestern University, Kellogg School of Management argue that although the economic shock of the current epidemic could depress the quantity of patents, it could also lead to a stronger innovation over the next decade as the quality of patents improve.
Their new study, Crisis Innovation, is the first analysis of the role that distress from the Great Depression played in the long-run for innovation activity and organization in the U.S. economy. Babina, Bernstein and Mezzanotti measured the total and average future patent citations to study whether the decline in the quantity of innovation was also accompanied by a decrease in overall quality. They found that in the years following the market crash of 1929, the financial shock led to a large decrease in independent innovators who invented on their own, but also a rise in the quality of innovation.
Researchers also found that many independent inventors struggled to secure financing to fund innovation because as bank distress was tied to the fortunes of local wealthy “angel” investors who financed these innovations. Instead, the entrepreneurs with the best patented ideas were hired onto the staff of large firms that were well-capitalized and equipped with Research and Development labs.
A recession that delivers a large shock to financing, the researchers argue, can lead to a reallocation of talent. As economic losses continue to mount from the COVID-19 pandemic, the new research could offer predictions for the next decade of innovation. If Silicon Valley inventors struggle to access capital over the next few years, they could choose to join large companies like Google, Apple, and Amazon – who could support innovation. But while total patents might decline, the quality of patents and their creativity emerging in this economy could strengthen.
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