The role of innovation in driving the economy: Lessons from the global financial crisis ☆ Angela Hausman a, ⁎, Wesley J. Johnston b, c a Howard University, United States b J. Mack Robinson College of Business, Georgia State University, United States c Oulu Business School, University of Oulu, Finland abstract article info Article history: Received 1 October 2010 Received in revised form 1 March 2011 Accepted 1 May 2012 Available online xxxx Keywords: Innovation Recession Economy Financial crisis The global financial crisis hit nearly every country in the world, devastating their economies, decimating the financial resources of their companies and citizens, and nearly collapsing the banking systems in their countries. While risky financial instruments and bad home lending practices receive much of the blame for this downturn, too few innovations introduced in the years leading up to the crisis also contribute to this collapse or, at a minimum, deepening the resulting recession. This paper draws on theoretical literature and contemporary media accounts, building the argument for a significant impact of innovations on the economy and its potential role in pulling the US economy out of the financial crisis. The paper develops propositions based on this review and discusses impli- cations for staving off future economic difficulties. © 2013 Elsevier Inc. All rights reserved. 1. Introduction “The financial crisis provides a sobering reminder of what happens when innovation fails to drive productive economic growth” (Applegate & Harreld, 2009). How did the recent financial crisis start? Media accounts blame the crisis on a combination of poor home lending practices and investment in creative financial instruments, such as derivatives. Banking practices and poor political decisions, including the take-over of Merrell Lynch and allowing the failure of Lehman Brothers, culminated in a one-day loss of over 500 points to the Dow Jones industrials on the US stock ex- change. The single-day stock market decline heralded a decline of nearly 50% in the US stock market over the next few months (Peston, 2008). The resulting recession featured a government take-over of Fannie Mae and Freddie Mac, huge bailouts to keep more banks from failing, and an economic stimulus package designed to bolster unemployment levels climaxing 10%. The recession spread beyond US borders, bringing eco- nomic decline and unemployment to most nations of the world. Undeniably, financial decisions weakened the economy, but evi- dence suggests that other factors contributed to the recession caused by financial failures. Therefore, fixing the economy may mean not only establishing better oversight of financial institutions and tightening mortgage markets, but fixing these underlying factors, as well. This paper focuses on one such factor, the relative lack of innovation among businesses in the US. The major research question concerns whether companies who are innovative, who provide products desired by consumers and effectively commercializes these innovations, contribute to a strong economy that more effectively weathers failures caused by other economic sources. Consensus supports innovation as a viable solution to economic woes, but does innovation forestall other factors driving toward economic de- cline? Innovative companies are in a strong market position, but does this strength create a series of cause/effect relationships allowing the firm to remain profitable and pay its employees? Similarly, is a country with strong, highly innovative companies less likely to experience re- cession or to reach the depths experienced in the recent recession? To answer these questions, the paper first shows evidence from top opinion leaders in government, non-governmental organizations, education, and industry demonstrating the substantial impact of in- novation on the economy and the lack of innovation as a contributing factor in the economic crisis. The paper also presents historical and statistical evidence showing support for innovation as a major driver of the economic engine. Innovation trends depict the innovation slowdown by US firms in the years leading to the financial crisis, especially relative to the levels of innovation in other nations, such as China and Israel. Evidence shows that a number of factors contribute to the decline in innovativeness, suggesting research propositions presented later. 2. Background 2.1. The impact of innovation on the economy “Innovation is critically important in contemporary economies. A key driver of the improvement in consumers' living standards is the Journal of Business Research xxx (2013) xxx–xxx ☆ The authors thank Ephram Okoro and Melvin Washington for their helpful suggestions on earlier versions of this manuscript. ⁎ Corresponding author at: Howard University, 2400 6th Street NW, Washington, DC 20026, USA. E-mail addresses: hausman1229@gmail.com (A. Hausman), MKTWJJ@langate.gsu.edu (W.J. Johnston). JBR-07782; No of Pages 7 0148-2963/$ – see front matter © 2013 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.jbusres.2013.03.021 Contents lists available at SciVerse ScienceDirect Journal of Business Research Please cite this article as: Hausman, A., & Johnston, W.J., The role of innovation in driving the economy: Lessons from the global financial crisis, Journal of Business Research (2013), http://dx.doi.org/10.1016/j.jbusres.2013.03.021