The global economic crisis of 2008/2009 hit many firms hard. Faced with rapidly declining
sales and highly uncertain economic prospects, firms had to cut costs and reconsider their
business strategies. With respect to innovation, cost cutting often means to stop or underresource
innovation projects which may harm a firm’s long-term competitiveness. Firms may
therefore refrain from reducing innovation budgets during crises but rather deliberately
allocate more resources to innovation activities in order to update their product portfolio for
the following recovery. Our analysis examines the effects of changes in innovation budgets
during the most recent economic crisis on firms’ post-crisis innovation performance. Based
on firm-level panel data from the German Innovation Survey covering the period 2006 to
2012, we find a positive effect of crisis adjustment. Raising the ratio of innovation
expenditure to sales does increase subsequent sales of market novelties, but not of product
imitations. Our findings are dependent upon the way business cycle effects are measured,
however. While the results hold for macroeconomic business cycle indicators (change in real
GDP), they do not for demand changes in a firm’s primary sales market. This may imply that
lower opportunity costs of innovation during an economic crisis are transferred into higher
post-crisis new product sales by firms in markets less strongly affected by the crisis.
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