Coronavirus Pandemic: Potentially Strong Negative Effect on Innovation Activities

According to Janger and Reinstaller, general economic policy measures to support liquidity and the economy as well as the promotion of existing research and development (R&D) and innovation promotion instruments are necessary to avert longer-term damage caused by the coronavirus pandemic.

The coronavirus pandemic is currently leading to sharply declining sales prospects and thus potentially also to a reduction in innovation activities. At present, there is also great uncertainty, which is poison for all long-term, high-risk innovation projects. The longer the crisis lasts, the more a quantitative and qualitative change in innovation activities is to be expected, which can impair a rapid recovery after the crisis.

Innovation activities are usually pro-cyclical (see Reinstaller, 2019 for an overview) because it is usually easier to successfully launch products in growing markets. Innovation activities can thus exacerbate short-term growth slumps and negatively affect the recovery of the economy in the longer term. Financial constraints on companies can intensify these outcomes: research, development and innovation are mostly intangible activities that are not well suited as collateral for loans. R&D efforts are therefore typically financed by the firms' internal cash flow, which in turn depends on sales, or subsidies.

Based on the current results of the WIFO-Konjunkturtest (business cycle survey), more than 20 percent of innovation-active companies in the tangibles manufacturing sector could forego product launches compared to a scenario without the crisis (fluctuation range between 10 and 38 percent depending on the scenario). This magnitude is composed of the deterioration in the assessment of the business situation (7 percent) and the reduction in spending on product launches (13 percent). If banks restrict their lending, the effect of the reduction in spending on product launches could be even greater. The reported results are limited to companies in the manufacturing sector and to product launches.

This trend is partly counteracted in the short term by the observed persistency of innovation activities and by industry effects such as rising demand for new drugs or medical equipment. On the other hand, the effects of the coronavirus pandemic are not yet fully reflected in the current WIFO-Konjunkturtest (business cycle survey) of March as in Austria the effects of the lock-down unfolded only in the second half of March. The estimated effects could therefore be even more pronounced and lie rather at the upper limit of the estimates. The mechanical engineering and metalworking industries are particularly affected.

According to an initial estimate, R&D spending by the corporate sector in 2020 is likely to grow by only 1.8 percent, which corresponds to a decline of 3.4 percentage points or approximately a 211 million € decline in expenditures compared to 2019 if the WIFO economic scenario of March 2020 is assumed. However, if the crisis were to follow the course of the economic slump in 2008 and 2009, the decline in R&D spending could amount to up to 4.5 percentage points or slightly more than 300 million €. Since the growth of R&D expenditure in the business enterprise sector has already been significantly curbed after the financial and economic crisis in 2008-09 compared to the period 2000-2007, the current decline in economic activity could further dampen the dynamics of R&D expenditure, which is likely have a negative impact on the long-term growth of the Austrian economy.

These assessments underscore the need for economic and innovation policy support measures that provide operational support, for example for corporate liquidity, reduce general uncertainty and further support specific innovation efforts. It would be very helpful to limit work disruptions of funding agencies and ensure access to research and innovation funding by extending the submission deadlines for calls for proposals and by making funding commitments in a timely and unbureaucratic manner. This applies both to direct subsidies from the Austrian Research Promotion Agency (FFG) and to the Austrian R&D tax credit. In both cases, fast and timely disbursements could help to stabilise the situation of companies engaged in innovation activities and support a rapid recovery after the crisis.