Exploration versus exploitation: The role of the business cycle

This paper studies how the interplay between the cycle and firm-specific characteristics (firm size and exporting activities) shapes firms’ choice between exploratory and exploitative innovation investments. We analyze the PITEC database, a panel of Spanish firms in manufacturing and service industries with data spanning the 2005–2013 period, which includes the Great Recession years, characterized by sharp demand reductions and increased industry turnover. The results show that: 1) downturns affect exploration more than exploitation, making the probability of firms being classified as exploratory pro-cyclical; 2) the impact of downturns is stronger among small and medium enterprises (SMEs) than among large companies; and 3) exporting companies seem to be less affected by the cycle in their choice between exploration and exploitation. These results contribute to a deeper understanding of how external shocks interact with internal firm characteristics to shape innovation pathways.