The impact of exogenous shocks on the innovation performance of firms in the Caribbean small island economies: Quasi-replication of Paunov (2012)

Abstract

In this paper, we investigate how exogenous shocks affect firms' innovative activities and also uncover the factors that can support and drive firms' innovation during crisis events. We underpin our conceptual framework on the cyclicality and procyclicality theory views and develop a quasi-replication methodology for Paunov's (2012) study, which used survey data collected by the OECD during the 2008–2009 global financial crisis (GFC) from eight Latin American countries (LAC). We use a new dataset covering 13 Caribbean economies (N = 1979), during the COVID-19 pandemic. Using Probit regression, we confirm that, like the GFC, the COVID-19 shock led many firms to stop ongoing innovation projects, corroborating Paunov's original findings and the procyclicality theory. Nevertheless, as we step-by-step extend the replication methodology we deviate from the original hypotheses and focus on uncovering which elements can support firms' innovation activities during adverse conditions. In doing so we find that funding was important to support new innovation activities during the COVID-19 pandemic and also that the size of firms' R&D department and their investments in product R&D and process R&D enhanced the development of innovations during this exogenous crisis.