Exploring the Impact of an External Crisis on R&D Expenditures of Innovative New Ventures

What is the impact of an exogenous crisis on research and development expenditures of innovative new ventures? Existing literature does not provide a clear answer. One view suggests that shrinking revenues and constrained funding reduce firms' R&D intensity. The opposite view argues for amplified risk-seeking and innovative behavior of organizations in crisis, leading to higher commitment to R&D with resulting additional investments. We unite these opposing views in a generalized behavioral framework based on the premise that the impact of a crisis on a venture's R&D expenditures is contingent on its pre-crisis R&D intensity. When facing a crisis, R&D-intensive companies reduce their R&D commitment, while non-R&D-intensive companies do not alter their R&D expenditure budgets, or even increase R&D spending to innovate themselves out of the adversity. We empirically test our behavioral framework using the longitudinal data from the Kauffman firm survey. The results strongly support our theoretical reasoning: during the 2008 financial crisis R&D-intensive ventures tended to substantively decrease their R&D investments (on average more than 10 percentage points decrease in R&D to sales), while their non-R&D-intensive counterparts demonstrated positive (although statistically insignificant) change in R&D investments. In other words, a crisis strikes most deeply the R&D activity of the most innovative ventures, despite the rational need to sustain R&D funding in industries with rapid technological change and short product life cycles. We conclude by positing underlying reasons for the observed behavioral patterns, and then suggest avenues for further research