Exploration versus exploitation : the role of the business cycle

This paper studies how the interplay between the cycle and firm-specific characteristics (firm size and exporting activities) shapes firms' choice between exploratory and exploitative innovation investments. We analyze the PITEC database, a panel of Spanish firms in manufacturing and service industries with data spanning the 2005-2013 period, which includes the Great Recession years, characterized by sharp demand reductions and increased industry turnover. The results show that: 1) downturns affect exploration more than exploitation, making the probability of firms being classified as exploratory pro-cyclical; 2) the impact of downturns is stronger among small and medium enterprises (SMEs) than among large companies; and 3) exporting companies seem to be less affected by the cycle in their choice between exploration and exploitation. These results contribute to a deeper understanding of how external shocks interact with internal firm characteristics to shape innovation pathways.