Many firms across the globe have underscored the need for creative approaches and strategies in their business activities in order to compete effectively and have sustainable growth and success. The ongoing global financial and economic crises pose serious implications on innovation of firms across the world. This is based on the fact that global economic turmoil has the potential impact on the innovative and market strategies of firms across the world, majorly in Europe and America where the problem is profound. This paper explores the effects of global economic crisis and recession on innovation programs of European companies.
Implication of Current Global Financial Crisis
Since innovation relies on resource allocation in terms of research and development, it is likely to be affected by current global financial crisis (Nakagawa,2006). A closer scrutiny of various European firms has revealed a significant change in innovation investment amidst the economic crisis. A survey conducted in 2009, revealed significant shifts in innovation investments across various firms in Europe where innovation investment and expenditure in firms declined from 40.2 percent to 10.6 percent (Filippetti and Archibugi,2010). The reduction in innovation investment and expenditures was attributed to direct effects of global financial crisis and recession. The economic crisis and recession reduces the short-term willingness of firms to engage to invest in innovation due to adverse macroeconomic environment that firms operate within (Archibugi, Filippetti and Frenz,2010).
The mode of financing channels for European enterprises has been through bank loans, stock and bond market. In fact, most European banks have reviewed and tightened their money supply regulation due to global financial crisis (Fasnacht,2009). These has affected cash flows to companies as more banks continue to engage in new business models that are geared towards stability amidst the crisis. Firms in these sectors are unable to commit resources on innovation activities due to limited availability of credit and tightened lending rates from United Kingdom banks (Adair, Berry and Haran,2009).
Most firms rely on profits and extra revenues for their research and development initiatives. Since the global economic meltdown is directly related to earnings of companies, any slight reduction in companies’ profits can affect their innovation approaches and incentives (Savona, Kirton and Oldani,2011). All business sectors and companies in Europe have felt the effect of the ongoing financial crisis in varying degrees thus leading to deterioration of their revenues and profitability. The reduction in financial results of European companies is linked to reduction in consumerism, export cut back or reduction and shifting demand in domestic consumers.
Cash flow and increased profitability and revenues are crucial for the survival of companies in relation to engagement in innovative activities. Robust and increased cash inflow in terms of profitability and increased revenues provides the safest protection of companies to engage in innovation. Research and development initiatives in European firms have hence been affected by the ongoing global recession due to the fact that their commitments to innovation have been pegged on success in revenue and profit growth.
On the other hand, the ongoing financial crisis and economic turmoil has not affected the commitment of other European companies to innovation. This is particularly evident in high performing businesses that continue to invest in innovation amidst the economic turmoil (Heinrich and Betts,pg.2003). Although other firms and businesses have panicked and reduced investment on research and development, some high performing firms have remained calm and are continuing to invest in innovation even though there has been pressure for such companies to reduce capital expenses (Shahzad, Ullah and Azam,2010). The rationale behind this approach is future investment aspirations where opportunities are likely to emerge after the end of the economic turmoil. Despite the recession and global economic crisis and its severe challenges, businesses and firms in Europe are weathering the storm by engaging and developing other innovative approaches that are geared towards enhancement of productivity (Fagerberg,2009).
It can also be argued that the global financial crisis provides perfect chances and opportunities for European companies to engage in new innovation models that are tailored on the current market prospects. The assertions is also supported by various studies that have shown that economic crisis and meltdowns provide good opportunities for enterprises to undertake counter-cyclical and innovative moves that can strengthen their competitive position (Ucaktürk, Bekmezc and Ucaktürkc,2011). Most firms in European countries and in particular, United Kingdom has traditionally developed in relatively stable and favorable economic conditions and since the financial crisis has resulted in significant market changes, they have no choices but to adopt and strengthen their innovation strategies. Majority of banks in United Kingdom and Ireland have used the opportunities presented by the current global financial crisis to undertake various innovation strategies. They are increasingly devoting their resources towards research and development in order to develop new products and services that can sustain their growth. United Kingdom banks have resorted to financial innovations as an option to remain competitive and for continual growth (Adair, Berry and Haran,2009).
The global economic crisis can therefore spur and encourage innovations among various firms in Europe as it has changed the conventional ways of doing business and hence companies are prompted to identity and develop other innovative strategies, products, services and processes that can enable them stay and expand their market share (Savona, Kirton and Oldani,2011). The ongoing economic crisis has the potential of helping European firms to focus on innovation so as to have strong competitive advantage. United Kingdom Firms have adapted and re-aligned their innovation models and strategies so as to cope with the current economic condition and recession in order for continual increase of their profits and market share (Ucaktürk, Bekmezc and Ucaktürkc,2011).
The global economic and financial crises pose serious challenges to the growth of firms and in particular in relation to innovation. This is because they have the potential of influencing innovation and entrepreneurship in firms since both depend on flow of resources and capital. Global economic turmoil can hamper innovation in firms by creating deficit and shortages in innovation investments as evidenced by various firms in Europe. However, on the other hand the ongoing global economic turmoil and recession is a blessing in disguise for firms in relation to innovation and entrepreneurship.