Heterogeneous Innovation over the Business Cycle

Schumpeter (1939) claims that recessions are periods of “creative destruction,”
concentrating innovation that is useful for the long-term growth of the economy. However
previous research finds that standard measures of firms’ innovation, such as R&D expenditures
or raw patent counts, concentrate in booms. We argue that these measures do not capture shifts
in firms’ innovative search strategies. We contemplate firms’ choice between exploration vs.
exploitation over the business cycle and find evidence with more nuanced measures of patent
characteristics that firms shift towards exploration during contractions and exploitation during
expansions, with a stronger effect for firms in more cyclical industries.