Firm-level impact of the global financial crisis: Evidence on innovation from Latin America

The long-term effects of the 2007-2009 Global Financial Crisis on Latin American economies depend on how firms altered their innovation activities in response to this and similar financially initiated shocks. We develop and test a novel theoretical framework that analyses the return to innovation for firms that survived this crisis in Latin America. We use detailed firm-level data that allows us to understand how firms reacted to the crisis and their subsequent outcomes post-crisis. We show, subsequent to several robustness checks, that: (i) product and process innovation are strongly correlated with each other over the business cycle; and (ii) although the return to innovation is positive (independent of the business cycle), the return to product innovation may be greater during recessionary periods.