Profs. Elisa Operti, ESSEC Business School, and Amit Kumar, Warwick Business School, put the research lens on innovation during recession to understand which factors truly drive momentum and impact.

By CoBS Editor Antonin Delobre. Related research: Kumar, A., & Operti, E. (2025). Recessions, institutions, and regional exploration. Research Policy, 54(2), 105189.

When stagnation is hot on our heels and the choice is between diving in or being eaten alive, the choice for institutions is not always obvious. According to the economist Schumpeter, the right answer is neither surrender nor flight, but rather combat. Creative combat, that is. For him, innovation stems directly from disaster. Moreover, this is what French philosopher Edgar Morin calls disorder or entropy, which stimulates the world and pushes it to evolve. In these contexts, Profs. Operti and Kumar question how this innovation can make its mark at the regional level during recessions.

A first step would be to differentiate between two types of innovation: exploitation and exploration. Exploitation refers to innovation that extends already established technological trajectories by improving or refining existing solutions (incremental innovation). Exploration, on the other hand, refers to innovation that goes beyond a region’s existing knowledge base by defining new problems or seeking novel solutions in unexplored areas of technology.

Innovation and Institutions: Love and apprehension

Existing research shows that recessions generally lead to a decline in R&D spending and the number of patents filed, due to higher capital costs, credit constraints and low expected returns. Innovation is therefore often considered procyclical. However, several authors, following Schumpeter, argue that recessions are also periods of ‘creative destruction’ that drive the emergence of new technological paths. Indeed, the academic Mensch observes that major crises have historically been associated with waves of fundamental innovation, with more recent research confirming that companies, faced with the failure of their established trajectories, turn to exploration.

The uncertainty effect plays a central role: in a context where exploitation prospects are limited, investing in risky but promising technologies becomes relatively more attractive. In addition, institutions play a key role in financing innovation, especially during a recession, tending to support R&D, which is neglected by private investors. As such, universities play a major role thanks to their independence, their alumni networks, their infrastructure and their endowments.

However, the key factor in financing, both during a recession and in a healthy economy, remains bank financing. Here, the distinction must be made between local and international banks, which, as we will see later, have different objectives and exposures.

Public or Private: Who is the fairest of them all for innovation?

Operti and Kumar’s research —studying U.S. metropolitan statistical areas from 2002 to 2015, before and after the Financial crisis of 2008—explores and analyses four hypotheses:

• The first is that the more intense a recession is in a region, the higher the probability of observing technological exploration there: exploration is therefore countercyclical.
• The second is that this effect could be partly mediated by an increase in public R&D spending, which is expected to rise during periods of crisis to compensate for private sector reluctance.
• The third concerns university research: it is thought to be positively associated with exploration and could therefore indirectly transmit the effect of recessions.
• Finally, a fourth hypothesis concerns the banking sector: the rise of international banks in a region after a crisis should increase exploration capacity, as these institutions have diversified resources and greater risk tolerance than local banks.

The first hypothesis is confirmed by regression models. Taking the Housing Price Index as a proxy for the intensity of the crisis, Operti and Kumar’s research saw that this index is negatively correlated with exploration, measured as the share of patents in technologies new to the region (MSA). Thus, the deeper the recession, the greater the number of patents in new technological fields—i.e.,  exploration is counter-cyclical.

Conversely, the second hypothesis is disproved. Public spending on R&D rises during a recession, but it is not directed exclusively towards exploration; in fact, the trend is to stimulate incremental innovation rather than take risks with expansion into previously untapped technology fields.

Similarly, university research is positively associated with exploration overall, but it does not increase during recessions; thus, it does not explain the effect.

As for the increased presence of international banks in a region during and after the crisis, analyses do indeed show that they a measurable —though limited—role. An increase in the local predominance of international banks during recessions partially transmits the effect of downturns onto regional exploration (≈11.5% of the total), indicating a modest yet statistically reliable channel.

Ultimately, what should we think about innovation during regional recessions?

Operti and Kumar clearly demonstrate the opportunities that lie hidden within recessions. Their main hypothesis, which sought to determine whether exploration for a region is countercyclical, was found to be valid: the deeper the recession, the more regional players engage in the search for new trajectories. This finding is consistent with Schumpeter’s intuition of creative destruction and confirms, at the regional level, what other studies had observed at the firm level.

Meanwhile, thanks to its geographical diversification and ability to absorb shocks, the international banking sector becomes more present locally during crises. This structural shift in the banking landscape partly explains the increase in regional exploration: international banks help to maintain minimal access to financing, while local banks, which are more fragile, reduce their exposure. However, their role remains indirect and limited, as their cautious approach does not directly encourage them to finance exploratory risk-taking.

The study’s main finding is that neither the state, despite its spending, nor universities, despite their potential, are the actors that transform a recession into a time of exploration. The momentum is driven more by private actors, particularly financial ones, which shifts the centre of gravity of exploratory innovation beyond the direct control of public authorities.

Profs. Operti and Kumar’s findings have several implications. If public policies are to truly stimulate exploration during recessions, they should be designed differently than as a simple increase in R&D spending. The aim should be to design instruments specifically geared towards supporting risky and still uncertain trajectories. Similarly, strengthening the capacity of universities to maintain and develop their research during periods of economic contraction would be a lever for prolonging the positive effect of crises on exploration. As for the banking sector, its structure plays a crucial role: an environment dominated by fragile local banks limits exploration, while the presence of diversified international banks opens up space for risk-taking.

Useful links:

• Link up with Profs Elisa Operti and Amit Kumar on LinkedIn
• Read a related article: Foreign Direct Investment and hot labour markets: Raising the bar
• Discover ESSEC Business School and Warwick Business School
• Apply for the ESSEC MBA
• Apply for the Warwick MBA.

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