Strong Innovation Activity Ensures Survival of Firms in the Crisis Year 2020

In the Covid-19 pandemic, it was shown that young firms – i.e. those up to four years old – proved to be particularly adaptable. They adjusted to the new situation and, on average, the share of young firms with process innovations even increased. Moreover, their continued innovation efforts helped them to secure their existence even during the crisis. This is the result of a recent evaluation of IAB/ZEW Start-up Panel surveys.

According to the survey, one in ten young firms introduced a market innovation in the crisis year 2020. That is three percentage points more than among established firms. “The above-average innovation share of young firms shows that they are not only able to keep up with the established ones, but have the potential to outperform them and thus strengthen competition in their respective sectors,” says Dr. Sandra Gottschalk, one of the authors of the IAB/ZEW Start-up Panel and a researcher in ZEW’s Research Unit “Innovation Economics and Industrial Dynamics”.
In addition, there was a noticeable increase in process innovations in the year under review: one in four young firms was active in this area. This is an increase of five percentage points compared to the reference year 2018 – i.e. before the pandemic. “The increase could indicate that the Covid-19 crisis and the accompanying restrictions made process innovations necessary,” says Gottschalk.
Overall, the coronavirus pandemic has triggered different, sector-specific effects on start-up activity in Germany. The number of new firms in 2020 fell only slightly compared to the previous year and even rose again in 2021. There are clear winners and losers from the crisis. Unsurprisingly, start-up activity in the hospitality and tourism industry slumped the most in 2020, falling by 25 per cent compared to 2019. In contrast, the chemical industry recorded an increase of almost 16 per cent and in the software and games sector, start-ups even rose by 31 per cent. Overall, the number of start-ups exceeded the number of closures in both 2020 and 2021. This is probably largely due to the financial aid paid out, the regulations on short-time work and the temporary suspension of the obligation to file for insolvency.
The IAB/ZEW Start-up Panel tracks the development of newly founded firms over several years and provides extensive firm-specific information. For this purpose, about 6,000 firms are interviewed by phone every year on behalf of ZEW Mannheim and the Institute for Employment Research (IAB).