Overcoming the current economic crisis and ensuring long-term competitiveness and growth is a key policy challenge for Europe. Since innovation is the classical source of knowledge creation, it is seen as key driver for competitiveness of firms and, consequently, for economic growth. A key question in the current debate is whether countries hit by the crisis are able to develop new industries and seize growth opportunities offered by new technologies and ideas. This greatly hinges upon firm’s innovation behaviour during recessions in particular and over the business cycle in general but also how innovation affects long-term competitiveness and growth under these circumstances. The literature studying the relationship between innovation and business cycles has mainly focussed on the question whether the business cycle has an impact on firms’ innovation behaviour. So far, however, there is only scarce evidence whether and to what extent employment growth or the returns to innovation (measured as increase in productivity) also vary with the business cycle. For instance, it is likely that the business cycle matters for the extent to which firms’ pass on cost reductions induced by process innovation and for the extent to which they are able to stimulate demand of new products.Against this background, the overarching aim of this contribution to the 2014 Competitiveness Report is to study and enhance our knowledge of the micro-dynamics of innovation and firm growth in Europe, in particular in terms of employment growth. A special focus will be laid on the changing dynamics over the course of the business cycle. Using data from the Mannheim Innovation Panel and several waves of the European-wide Community Innovation Surveys (CIS) and the model recently proposed by Harrison et al. (2008), the project has tackled the following main research questions:

• Are product and process innovation conducive to productivity?
• Do product and process innovation stimulate employment growth? Or does jobless growth take place?
• To what extent do productivity and employment effects of innovation depend on the business cycle?
• For instance, do firms create less employment due to product innovation in recession periods?
• Are labour-saving effects of process innovation larger during a cyclical fall?
• Or does the basic relationship between innovation on employment remain stable during different phases of the business cycle and it is for instance only the fact that firms are less engaged in innovation during recession periods that lead to a lower contribution of innovation to employment growth during recessions?
• Do industries differ in the way innovation creates employment growth in different phases of the business cycle?

The project results have become established in the Competitiveness Report 2014 of the European Union.

The executive summary of the background study can be downloaded here.

The full report of the background study can be downloaded here.