Investing in innovation in hard times

A professor’s analysis of innovation during the Great Depression suggests that downturns can present opportunities — if you have cash and good ideas.

How much should companies invest in innovation in difficult economic times? In a new article in The McKinsey Quarterly, Tom Nicholas, an associate professor at the Harvard Business School, looks to the Great Depression for lessons.

Nicholas examined U.S. patent applications by companies with R&D labs in the 1930s and found -- not surprisingly -- that the number of U.S. patent applications grew more slowly then than in the booming twenties.  What's more, in the thirties, the number of patent applications fluctuated more in relation to the economy: After a year of economic growth, patent applications were apt to go up the next year and, conversely, were apt to drop after a year of contraction. However, Nicholas points out, some companies that made savvy investments in innovation benefited: DuPont discovered and commercialized neoprene and nylon during the thirties, and Hewlett-Packard was launched then.

So, is it wise to invest in innovation in a downturn? For businesses with money and good ideas, Nicholas concludes, such periods can offer excellent opportunities.

On the other hand, it's hard to invest in new ideas if you don't have the cash. That's a situation that some start-ups could face if they depend on venture capital or hope to gain it-- given recent reports that some venture capital firms may have trouble collecting promised capital from their own investors and that there may be a shakeout in the venture capital industry.