Innovate your way out of the recession

The last time the economy caught flu, the innovation community may have had a hard time, but it did not hibernate completely. Google is probably the most famous example of a business with its roots in a recession. Now there is evidence from the Institute for Manufacturing (IfM) at the University of Cambridge Engineering Department that in one region at least, Cambridge, high-tech companies that opened for business in the recession had a higher survival rate than businesses born in boom times.

Alex Drofiak and Elizabeth Garnsey of the IfM have looked at the performance of companies over the past two decades. Their findings appear in a new working paper The Cambridge High Tech Cluster: resilience and response to cyclical trends. “During the recession of the early 1990s,” they write, “a smaller cohort of tech start-ups achieved higher survival rates than those started in boom years.”

The researchers set out to “identify discontinuities in the expansion and contraction of technology-based firms and jobs, against the background of cyclical influences”. Their study shows that the nature of the high-tech businesses influences the region’s economic development.

One reason why Cambridge fared better than others is that it didn’t rely so much on Internet start ups.  “The relative immunity of Cambridge firms to the Internet crash between 2000 and 2002 was partly the result of relatively few high tech Internet firms having been founded in the area.”

In general, though, there was a marked decline in tech businesses in the Cambridge area between 2002 and 2006 “caused by a high failure rate amongst new IT software companies, started during the technology boom”. However,  some sectors, “biotech and R&D” saw steady growth through the 1990s and early 2000s with an increase in both firm and job numbers.

Cambridge may have bucked the trend because it gave birth to “specialist firms in market niches with a relatively low failure rate, a different dynamic from that in larger population centres with more internet firms.” One such niche, a mini-cluster even, is inkjet printing where the five firms in the area expanded from 297 employees in 1988, to 840 employees in 1998, and up to 1055 employees in 2008.

One factor in the ebb and flow of businesses into the area is the ‘birthplace’ of the parent company. When it comes to the success rate of the larger businesses, companies with their roots in Cambridge generally do better than companies that move into the area in an attempt to tap into the region’s high-tech expertise.

Mergers and acquisitions (M&A) also play a part. “Cambridge technology firms are attractive targets for acquisition by corporations seeking to improve their innovation performance by buying a promising technology and/ or innovative team,” says the report. But acquired companies don’t always survive in the region.

There was a flurry of M&A activity during the post-1996 tech boom, mostly in telecoms, IT software, instruments and biotechnology. One consequence of this is that businesses can get shut down during recession as the acquirers pull in their horns.

It depends on the tech sector, but the IfM’s numbers for the period between 1994 and 2006 show that job losses follow acquisitions. “For those firms issuing performance figures for acquired units, there were 1365 fewer jobs after acquisition than there had been when these firms (in biotech, instruments, IT software and telecoms sectors) were independent.”

The availability of financing is also important. There may be more venture capital around in Cambridge than there was, but businesses also need banks to back them. After 2004, “tech start-ups may have been disproportionately affected by financial stringency during the housing boom”. Indeed, that boom may have helped to starve tech businesses of cash.

One theory is that banks preferred putting money into mortgages rather than high-tech businesses. Interviews with former bankers, revealed another factor, a shortage of bankers knowledgeable about technology firms.

When it comes to the survival of those companies that did come into being during recessionary times, the IfM report suggests that this could be because “Only firms with better prospects may have been founded in the recession of the early 1990s and these benefited from the economic expansion later in the decade.” This suggests that, if this phenomenon persists, while fewer companies may have come into being in recent years, more of them may still be around after the recession.

One difference between today’s start ups and those of earlier times is that “many Cambridge firms are developing innovations with actual or potential applications to environmental products and services”. So the region may be better placed to exploit a “cleantech” wave.

The report highlights the role of government procurement in encouraging the growth if cleantech businesses.  “New companies need customers for their innovations. Government procurement of innovative products and services could demonstrate their value and stimulate private sector demand.”

There is a role model that the government could follow. “In the Netherlands, all products procured by government will have to achieve high standards of sustainability by 2012, a way of stimulating demand for environmental innovation.”

Whatever the sector, when it comes to creating new businesses, the authors warn that technology based firms “have been showing signs of contraction since the technology downturn. While credit was available, they were subject to pressure from the financial sector to achieve value-capture more rapidly than was feasible. Unless these firms have the funds to create new value for users, financial value-capture cannot be sustained.”