Innovation over the business sector cycle: the interrelated effects of knowledge flow and firms' strategies on patents' creativity

Since Schumpeter's seminal contributions, the relationship between economic fluctuations and innovation has been the core of an interesting debate in the economics of innovation literature. This paper explores the impact of... [ view full abstract ]

Since Schumpeter's seminal contributions, the relationship between economic fluctuations and innovation has been the core of an interesting debate in the economics of innovation literature. This paper explores the impact of fluctuations in the sector business cycle on knowledge recombination processes under the constraints imposed by recession periods. To uncover this relation we analyse USPTO patents data linked to Compustat financials further complemented by the NBER-CES Industry Database for the United States Manufacturing sector from 1980 to 2000.
Results suggest that during economic downturns, organizations are likely to rely on knowledge recombination processes that, by combining familiar components, generate inventions characterized by higher level of conventionality. However, the acquisition of new knowledge is able to introduce
a higher variety in the organizational knowledge base that stimulate a higher level of originality in the knowledge recombination. Besides, firms are likely to employ in-house competences to develop more incremental inventions during booms whereas exploit external knowledge during recessions for developing more explorative inventions at the fringe of their technological competences.