Innovative Technologies Under Pressure: Young Companies and the COVID-19 Crisis

Young companies are particularly hard hit by the coronavirus crisis, since firms that have not been in the market for a long time are less able to cushion the effects of the crisis. Especially innovative high-tech firms face a great number of challenges. As these start-up companies create knowledge and develop new technologies, it would be very damaging for the German economy if they do not survive the crisis, explains ZEW economist Jürgen Egeln. In the latest episode of the #ZEWPodcast he talks about how young and innovative companies are suffering from the current crisis and what support measures they need. While this editions was published in German, there are plans to produce English editions of the podcast as well.

In the # ZEWPodcast “Wirtschaft • Forschung • Debatten”/“Economy • Research • Debates”, the deputy head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics” provides insight into the findings of a study about the effects of the coronavirus crisis on young companies that have been in business for less than four years. “As a result of the crisis, start-up companies experience more pronounced effects in either direction. This means that both negative and positive effects are more intensive than for established companies,” Egeln explains. The firms most affected by the crisis are consumer-oriented service providers, especially creative consumer-oriented services. Surprisingly, also high-tech industrial firms are particularly hard hit by the crisis.”

These high-tech companies faced great difficulties during the shutdown in spring 2020. Not only did the demand for their products collapse, but they also faced a liquidity crunch. In addition, the border closures put companies with close ties to international business partners under further pressure. “Even though these companies may have been in good shape, the variety of damaging factors places a particular burden on them,” Egeln goes on to explain. “These are companies that create new knowledge and establish new technologies if their projects are successful, thereby generating spillover effects on other companies in the economy.” Unlike high-tech start-ups, young firms from other industries mostly faced only one complex of difficulties.

It would therefore be a great loss for the economy if we were to see a wave of insolvencies among high-tech start-up firms. “For high-technology companies, there is a risk that newly created knowledge may get lost when these companies exit the market and the company founders end up in different places of the world, working for other firms.” Egeln suggests supporting these innovative companies with public liquidity measures. “Of course, in other areas, where it is common for firms entering and leaving the market all the time and where it is not possible to stimulate demand due to the nature of the services offered, it neither makes sense from the point of view of competition nor is it viable to save all companies,” concludes Egeln.