R&D and recessions

Before you slash that R&D budget, think again. You'd be bucking a proven trend: that invention can help cure recession.

America's centennial year should have been a time of national celebration. But in 1876, the U.S. was in the grip of the Long Depression – a six-year slump triggered by the failure of a large bank, a horse flu epidemic, the adoption of the gold standard, calamitous fires across the Midwest and the collapse of the Vienna stock exchange. The longest recession in U.S. history, it lasted 65 months.

With companies folding, the late 1870s seemed a perfect time to slash costs. Instead, Thomas Edison built the world's first industrial research lab in Menlo Park, New Jersey. Within three years, he had patented the first phonograph and commercially launched the incandescent light bulb, laying the basis for General Electric, now the third largest company in the world by market value, according to 2008's Forbes Global 2000.

So recession can be the mother of invention – and invention can help cure recession. Ideas can thrive when there is no other choice. The Kaufman Foundation's 2008 study Entrepreneurs and Recessions: Do Downturns Matter? analyzed 8,000 businesses launched over 175 years and found businesses started in downturns are more likely to succeed and have "a higher likelihood of turning out to be economically important".

In boom years, any business plan looks good. But when capital is scarce, poorly thought- through businesses find it harder to attract funds. Businesses that do launch make a compelling case for capital and can survive on an IV drip for cash flow.

America's recovery from the Depression of the 1930s was driven by the fact that industrial investment in R&D tripled in real terms. Alexander J. Field, professor of economics at Santa Clara University, calls this gloomy era "the most technologically progressive decade of the 20th century".

Employment of research engineers and scientists grew by 72.9% between 1929 and 1933. As recession bit, spend on R&D and structural engineering soared: between 1929 and 1936, 580 new R&D labs were founded. Field's figures show that output per hour in the U.S. private sector grew faster than during World War II.

The 1930s gave us the Golden Gate bridge, nylon, polystyrene, synthetic rubber, the jet engine, the photocopier, television, instant coffee and the Volkswagen 'Beetle'. They also inspired a Japanese textile machinery company called Toyota to make its first car.

Revlon launched in 1932, capitalizing on 'the lipstick effect' (where women indulge in smaller treats – make-up rather than new clothes – in a recession). Working with a chemist, Charles Revson used pigments rather than dyes to create a wider variety of shades, while sensual names such as 'Kissing Pink' intrigued women bored by the usual shades of red. By 1934, the company had grossed US$68,000 (€53,000); by 1938, it was making multi-million dollar revenues.

Andrew Razeghi, associate professor at the Kellogg School of Management at Northwestern University, says: "Moments of economic turbulence offer a unique opportunity to start new businesses, launch new products and strengthen customer loyalty, often at a discount." Shrewd management in a recession is not all about cutting costs. Innovation in turbulent times may be risky, but the rewards can be immense.