Journal of Business Research 110 (2020) 360–369

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Journal of Business Research

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The impact of the 2008 financial crisis on innovation: A dominant design T

perspective
⁎
Alexander Brema, Petra Nylundb, Eric Viardotc,
a
Friedrich-Alexander-University Erlangen-Nuremberg, NCT Friedrich-Alexander-University Erlangen, Chair of Technology Management, Dr.-Mack-Str. 81, 90762 Fuerth,
Germany
b
Friedrich-Alexander-University Erlangen-Nuremberg, NCT Chair of Technology Management, Dr.-Mack-Str. 81, 90762 Fuerth Fuerth, Germany
c
EADA Business School, C/Aragó 204, 08011 Barcelona, Spain

A R T I C LE I N FO A B S T R A C T

Keywords: The purpose of this study is to evaluate the impact of the 2008 financial crisis on innovation, as measured by the
Financial crisis emergence of dominant designs. A negative impact is substantiated theoretically and empirically, based on
Innovation longitudinal patent data from the OECD. This study also finds evidence for the moderating impact of globali-
Dominant design zation on the relationship between innovative performance and the emergence of dominant design. Thus, glo-
Globalization
balization is more important with regard to the establishment of dominant designs than it was before the fi-
Science-based industries
nancial crisis of 2008. Further, it is found that following the crisis, science-based industries tend to have more
dominant designs than other industries.

1. Introduction However, Schumpeter (1934) also considered that innovation was

the engine of economic recovery and prosperity in capitalistic systems.
The great financial crisis of 2008 is today considered to be one of Innovation plays a leading role in reigniting growth in economies and
the longest and most significant economic crises that the world has ever delivering new benefits to the world’s population and its varied socie-
seen (Bordo & Haubrich, 2017). It has driven a dramatic change in the ties (Kim & Huarng, 2011). Today’s neo-Schumpeterians emphasize that
21st century’s business environment, which had already experienced the unstable nature of the capitalistic system, and innovation, are two
the turbulent waves of the digital revolution, framed against a backdrop sides of the same coin (Archibugi, Filippetti, & Frenz, 2013). In light of
of steadily increasing globalization. Many factors contributed to this this history, this study seeks to evaluate the effect that the ruthless and
financial crisis, notably an increase in debt due to the introduction of lengthy financial crisis of 2008 had on the innovation strategies of firms
novel financial instruments, the emergence of a housing (mortgage) as they had to adapt to a sudden, and deeply turbulent business en-
bubble, irresponsible risk taking, and lax oversight (Hausman & vironment (Makkonen, Pohjol, Olkkonen, & Koponen, 2013).
Johnston, 2014a). The main effects of the crisis were a decrease—or The paper is organized as follows. First, a review of the literature on
slower economic growth—in industrial countries, persistently high the 2008 financial crisis and the funding of new innovation is pre-
unemployment, continuous private sector deleveraging, large public sented. Next, this paper introduces the concept of dominant design and
sector deficits and debts, much greater influence of politics on the how it acts as an indicator of innovation, which in turn leads to the
economy, a significant lowering of inflation, very low interest rates, and development of several hypotheses. Based on this, a methodological
an accelerated migration of growth and wealth dynamics into the approach is proposed and implemented, followed by a discussion of the
emerging world (El-Erian, 2014). results. Finally, this paper concludes with an analysis of any relevant
As a result, the financial crisis of 2008 can be interpreted as the limitations, and suggestions for further research.
“gale of creative destruction”, identified by Schumpeter (1942) in his
theory of business cycles as the characteristic form of capitalist devel- 2. Theoretical background
opment, with a succession of upturns creating opportunities for profit
and downturns providing scope for restructuring. (Tan & Mathews, A key part of Schumpeterian creative destruction is related to the
2010). funding of new innovations. Schumpeter (1934) considers finance as

⁎
Corresponding author at: Universität Stuttgart/University of Stuttgart, Institute of Entrepreneurship in Technology and Science, Pfaffenwaldring 19, D-70569
Stuttgart-Vaihingen, Germany.
E-mail addresses: alexander.brem@ets.uni-stuttgart.de (A. Brem), petra.nylund@fau.de (P. Nylund), eviardot@eada.edu (E. Viardot).

https://doi.org/10.1016/j.jbusres.2020.01.048
Received 18 February 2019; Received in revised form 20 January 2020; Accepted 22 January 2020
Available online 29 February 2020
0148-2963/ © 2020 Elsevier Inc. All rights reserved.
A. Brem, et al. Journal of Business Research 110 (2020) 360–369

essential to the innovation process, as the credit-driven money provided areas where innovation is a key competitive advantage; they have to
by financial institutions allows firms and entrepreneurs to invest in keep innovating in order to stay in business. Other research has also
innovation. reported that some European companies have kept or increased their
Since Schumpeter, 1934 work, finance has been seen as an im- innovation investments after the shock of 2008 (Archibugi, 2017). They
portant part of innovation management, but the numerous studies ex- are mostly younger, smaller companies which are searching for new
ploring the finance-innovation relationship have so far yielded decid- market opportunities, while older, larger companies are found to be less
edly inconsistent conclusions. prone to invest in innovation. Further, the financial crisis of 2008 has
One aspect of the literature follows Schumpeter’s position, arguing increased the difficulty for companies of financing innovation.
that there is a positive relationship between finance and innovation as More specifically, innovative firms have suffered more from the fi-
the financial system provides suitable resources for innovative projects. nancial crisis than non-innovative firms, primarily due to the difficulty
Furthermore, financing institutions can identify entrepreneurs with the of raising external funds. Research based on a sample of 16,000 firms in
best chance of developing an innovative product or service and they can Germany shows that innovative companies have reached the same re-
also supervise them to ensure that the project will succeed (Amore, duction in growth rates in turnover, but a stronger reduction in in-
Schneider, & Zaldokas, 2013; Hsu, Tian, & Xu, 2014; King & Levine, vestment growth than non-innovative firms in the aftermath of 2008
1993; Shang et al., 2017). (Giebel & Kraft, 2015).
But other studies suggest that financial support may hinder in- A similar situation has been observed in the UK where financing
novation. For example, banks may prevent firms from exploring risky worsened for both innovative and non-innovative companies during the
and high return projects such as R&D activities (Weinstein & Yafeh, great financial crisis: innovative companies were less successful in
1998). Credit markets favor investment in reputable and well-estab- achieving funding than other firms, and they were more likely to face
lished firms rather than in new or innovative ones because the risk of absolute credit rationing (Lee, Sameen, & Cowling, 2015). In the same
capital loss is lower (Morales, 2003). Additionally, the availability of vein, a study of Korean companies (Chung, 2017) found a decrease in R
credit makes it easier for less efficient firms to remain in the market, &D investments after 2008, which further substantiates the idea that
while also preventing more efficient innovators from entering said external financing of R&D investments had become more difficult for
market—which contributes to the forming of a monopoly such companies, so they were required to use their internal financial
(Asimakopoulos & Zhu, 2018; Philippe, Peter, & Ross, 2018). resources.
The impact of financing on innovation also depends on the in-
stitutional context (Levine, 2002). It is generally accepted that equity 2.1. Dominant designs and derivation of hypotheses
compared to debt is more appropriate for governmental R&D invest-
ment (Balakrishnan & Fox, 1993; Hill & Snell, 1988). Equity markets In view of the mixed evidence in the existing literature, one cannot
are well developed in “market-based” systems, such as in the UK and conclude that the great financial crisis has a clear effect—positive or
the US. However, many countries have bank-based systems, as seen in negative—on investments in innovation. However, innovation is not
Japan, Germany and any other European countries where banks have a only a process but also an outcome (Quintane, Casselman, Reiche, &
dominant role in the national economy and the financing of innovation Nylund, 2011). In academic research, there is a term for describing a
(Vitols, 2005). James and McGuire (2016) have found that higher levels turning point in the industrial development of an in-
of bank loan debt coupled with higher levels of R&D investment in- novation—dominant design (e.g., Anderson & Tushman, 1990).
crease firm performance in bank-based countries but decrease firm A dominant design appears when a single (technological) design
performance in market-based countries. emerges with innovation occurring along a defined technological tra-
The effects of finance on innovation may also depend on the so- jectory (Dosi, 2000) and becomes a market standard (Murmann &
phistication of a country’s financial infrastructure development. Frenken, 2006), which is accepted by competitors and innovators at the
Meierrieks (2014) for instance, found that higher levels of financial same time (Utterback, 1994). In terms of product lifecycle thinking, an
development coincide with stronger innovation activity, which is con- industry is forced to standardize its core components following the
sistent with Schumpeteŕs view. However, in a more recent paper, Law, emergence of a dominant design (Gawer & Cusumano, 2014). Earlier
Lee, and Singh (2018) detected an inverted U-shaped finance-innova- research indicates that such a shift from product to process innovation,
tion curve in countries with high institutional quality. The early stages initiated by a dominant design, can be found across many different
of financial development contribute positively to the innovation sector; industries (Brem, Nylund, & Schuster, 2016). Hence, a dominant design
however, the later stages of financing hinder innovative development can be seen as an indicator of a key change in market development,
because of an associated increase in the contractual interest rate on since dominant designs are usually the result of (lengthy) competition
loans and the monopolization of financial institutions. within the market and help delineate the competitive dynamics of in-
When studying the impact of the 2008 crisis on innovation, re- terfirm rivalry (Peng & Liang, 2016).
searchers have generally considered corporate investment into R&D. Such dramatic market changes are induced by open innovation ac-
They too present mixed or even conflicting evidence. For instance, tivities (Chesbrough, 2003) and, especially, by related disruptive in-
Paunov (2012) has found that the crisis led many firms in eight Latin novations (Christensen, Raynor, & McDonald, et al., 2015; Reinhardt &
American countries to cease ongoing innovation projects between 2008 Gurtner, 2015). However, the concept of disruption has also received
and 2009. Younger companies and businesses supplying foreign mul- several notable criticisms; including, for example, if it makes sense to
tinationals or suffering export shocks were more likely to abandon in- setup an external organization for disruptive innovations (Danneels,
novation investments than companies with access to public funding. 2004). Christensen, McDonald, Altman, and Palmer (2018) propose a
In Europe, Archibugi et al. (2013) have observed a general decrease more detailed concept, including aspects like trajectories in perfor-
in the willingness to invest in innovation across European companies as mance, response options, platform economy, and innovation perfor-
a direct consequence of the 2008 financial crisis. However, many mance management metrics, which is in line with other authors such as
companies have avoided this trend and have kept their levels of in- Hopp, Antons, Kaminski, and Salge (2018). In this context, Markides
vestment constant. Furthermore, the research shows local variations (2006, p. 23) notes: “Eventually, the wave of entry subsides and in turn
between Northern and Southern European countries. In countries such is followed by what is sometimes a sharp, sudden, and very sizeable
as Sweden, Switzerland, Finland, and Germany the number of compa- shakeout leading to the death of most of the early pioneers. The sha-
nies that have actually maintained or even increased investment in keout is associated with the emergence of a dominant design in the
innovation is greater than the number of companies that have reduced market, which signals the beginning of growth in the industry”.
it. The main reason for this is that some firms are highly specialized in Incumbent companies will most likely miss such industry growth,

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either because they have been too successful in pursuing their old countries—such as MNEs from emerging countries (Lynch & Jin,
business models (Christensen, 2003), or because the new design is too 2016)—the convergence is further delayed. The decrease of globaliza-
complex and the costs of adaption are too high (Roy & Sivakumar, tion in the great crisis should have strengthened this relationship.
2010). Therefore, the following hypothesis is formulated.
Hence, these firms are prisoners of their own success, and usually
Hypothesis 2. During the great financial crisis, globalization of
innovative start-ups will take their position in future iterations of the
innovation had a moderating effect on the relationship between
market. As a result, the emergence of a dominant design is a sign that a
innovative performance and dominant design so that innovative
disruption has occurred: even if in a first run, dominant designs can be
performance had greater impact on dominant design for higher
seen as a barrier to successful innovations, the new standards are still
values of globalization.
pitted against the dominant ones, which is not necessarily better
(Assink, 2006). Hence, dominant designs can also be perceived as a Industries vary in their mode of technical innovation. Pavitt (1984)
hindrance to innovation. Specific niches must be found for new in- distinguishes supplier–dominated sectors (e.g. agriculture, building,
novations, during periods of experimentation, so that they can get mining, commerce, etc.) where the limited innovations come mostly
started, until new standardizations processes are developed in order to from suppliers, while in scale-intensive (cement, glass, transportation,
foster their respective technologies (Suarez & Utterback, 1995). Within etc.) and specialized-suppliers (e.g., machinery production) industries,
this conception, dominant designs support an understanding of in- innovation is led mostly by larger companies. Finally in science-based
novation systems with specific technology transitions, which can be industries, innovation comes from the R&D activities of all firms.
achieved through niche-cumulation, technological add-on, and hy- While science-based industries are not homogeneous, dominant
bridization (Geels, 2002). Entrepreneurs and start-ups might serve as design has a key role; as some industries, including aerospace, electrical
players who use their respective ecosystems to establish innovation in a equipment, and pharmaceuticals, have already concentrated around
niche to gain access to the main market (Brem & Radziwon, 2017). one dominant design—which has become a standard. More recent
Moreover, it is important to note that dominant designs are not only sectors, including computers, software, telecommunication, robotics,
driven by technologies, but also by markets and complementary assets biotechnology, etc., engage in sequential competition through new
(Fernández & Valle, 2019). product versions. In these latter industries, dominant designs from
Srinivasan, Lilien, and Rangaswamt (2006) have shown that the leading firms tend to spread rapidly until they are replaced by new
probability of emergence of a dominant design depends on product dominant designs from competitors with more innovative products
characteristics—such as the appropriability of rents associated, the in- (Niosi, 2000).
tensity of network effects, the degree of radicalness, and the R&D in- During the 2008 financial crisis, science-based industries had grown
tensity—but also on the economic environment; more precisely, they faster than other classes of industry. For instance, in March 2018 the
found that “the presence of a recessionary environment delays the four largest global companies by market capitalization were science-
emergence of a dominant design” (page 9). Thereby, they define a re- based; namely Apple, Alphabet, Microsoft and Amazon, while in March
cession as two consecutive quarters of decline in real gross domestic 2009 they were supplier-dominated companies; namely Exxon, Petro-
product (GDP). In the US, the recession following the financial crisis China, Walmart and ICBC (PwC, 2018).
officially ended in June 2009, according to the National Bureau of When assessing the lessons from the financial crisis of 2008,
Economic Research (2019) (2019), but many economists maintain that Hausman and Johnston (2014b) establish that economic stability is
the crisis lasted much longer, extending to 2014 (El-Erian, 2014). positively related to discontinuous innovation as they take science-
based companies (Apple, Microsoft, as well as biotechnology and
Hypothesis 1. The great financial crisis is negatively related to the
health-care innovations) as illustrative that “increased economic pres-
emergence of dominant designs.
sure often fuels creative solutions” (page 2721). As such, this paper
Furthermore, the great financial crisis had a direct effect on the presents a hypothesis as follows.
globalization of business. The flow of global trade in goods, services,
Hypothesis 3. During the great financial crisis, science-based industries
and finance had grown consistently before the financial crisis, re-
were more related to the emergence of dominant designs than they
presenting 38 percent of global GDP in 1991, compared to 60.8 percent
were previously.
in 2008. However, it tumbled to 52.3 percent in 2009 and stayed below
pre-crisis level till 2017 (World Bank. Trade % of GDP. (2018), 2018).
Globalization has a direct effect on innovation, especially for mul- 3. Methodology
tinational enterprises (MNEs) (Hitt, Hoskisson, & Kim, 1997;
Sambharya & Lee, 2014). It enables companies to access cheaper R&D 3.1. Data
inputs from developing countries, and to draw on valuable knowledge
abroad (Lewin, Massini, & Peeters, 2009; Von Zedtwitz & Gassmann, The derived hypothesis is tested with longitudinal patent data from
2002), specifically from international R&D partners with superior the OECD REGPAT and OECD Citations databases, February 2016 edi-
technological expertise and better opportunity to facilitate creativity tion. Patent data is widely used to study management, and the OECD
(Nieto & Santamaria, 2007). Globalization also allows MNEs to ad- REGPAT database has recently been used by Belderbos, Du, and
ditionally introduce new, radical products to the market (Roy & Goerzen (2017) to study connectivity and location choice, whereas the
Sivakumar, 2010). OECD Citations database was used by Brem et al. (2016) to study in-
Further, globalization has given way to the emergence of global novation after the establishment of dominant designs. Patent counts are
dominant designs (Spencer, 2003). The lead market theory suggests often used to measure innovation (Griliches, 1990; Jaffe, Trajtenberg, &
that among different innovation designs that are competing in inter- Henderson, 1993; Joshi & Nerkar, 2011), since they correlate highly
national markets there is one that will be adopted by leading countries with alternative measures of innovation; e.g. R&D inputs, patent cita-
and thus become a dominant design that then diffuses globally (Beise & tions, and new product announcements (Hagedoorn & Cloodt, 2003).
Cleff, 2004). However, innovative performance, defined as the cumu- This study’s data contains a variety of information on each patent, in-
lated results of innovative activities for a technology or product cate- cluding the patent class that it belongs to and which other patents it
gory, has been related to a reduced emergence of dominant designs relates to through citations of other patents.
(Brem et al., 2016). Technologies with high innovative performance Data is used regarding patents filed at the European Patent Office
thus takes longer to converge towards a dominant design, and when (EPO), which is considered by some to better measure innovative per-
innovation is conducted by a large number of actors in different formance than patents filed at the United States Patent and Trademark

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Office (USPTO) (Belderbos, Cassiman, Faems, Leten, & Van Looy, 2014; NACE codes to the Pavitt taxonomy (Bogliacino & Pianta, 2010).
Jaffe & Lerner, 2004), since EPO patent examiners have lower work “Great crisis” is a binary variable, which is 1 if the year is after
load and spend more time on each application (Quillen & Webster, 2008, and 0 if it is not. “Year of great crisis” is if the year is after 2008,
2001). EPO patent data has been used in the study of the inter- and 0 if it is not. These two variables are used to test whether there is a
nationalization of innovation (Guellec & Van Pottelsberghe de la structural break in the data.
Potterie, 2001; Picci, 2010).
Patent classes with incomplete data are excluded in order to yield a 3.2.3. Control variables
balanced data set spanning 456 patent classes for the years 1980 to Characteristics of the financial system on the country level are
2013—in total 15,504 patent-class years. The hypotheses are tested on controlled for by incorporating data from the Financial Development
a variety of technologies while simultaneously controlling for diverse and Structure Dataset of the World Bank (Čihák, Demirgüç-Kunt, Feyen,
technology characteristics. & Levine, 2012).
“Market-based financial system” is the logarithm of the total value
3.2. Measures traded ratio divided by the bank credit ratio, and thus, measures the
activity of stock markets relative to that of banks (Levine, 2002). The
3.2.1. Dependent variable mean of this variable is used per patent class and year.
A technology class has a dominant design when most of the designs “Central bank assets to GDP” is the patent-class mean for each year
share the same underlying technology (Murmann & Frenken, 2006). of claims on the domestic real nonfinancial sector by the Central Bank
Dominant design is measured binarily as existing or non-existing in a as a share of GDP (Beck, Demirgüç-Kunt, & Levine, 2000).
certain patent class during a specific year. Technologies are considered All independent and control variables have been lagged by two
to share the same underlying technology if they cite the same patent, years, since the establishment of dominant designs usually takes several
i.e., refer to the same design. A dominant design exists in a patent class years. A time-lag analysis is conducted to ensure the correct time-lag
year if the percentage of patents that cite the same patent is above a has been set, and no hidden effects can be revealed by shorter or longer
threshold value of 50 percent. This value is used as it represents a time lags.
majority of citations—a design is dominant if a majority of innovations
in a patent class include the same design (Brem et al., 2016). Citations 3.2.4. Method
are included which are not only made by the inventors but also by the A Probit regression model is used for the data analysis, since the
patent examiners, since examiners add citations when they find a dependent variable “dominant design” is a binary variable (Argyres &
technology build on a previous patent, even if the author has not cited Bigelow, 2010). To include both time-variant and patent-class effects,
it. The year used for each patent is the year of the first application for population-averaged Probit-regressions are used with panel-specific
that patent. This way innovations made during the same year are first-order autoregressive (AR(1)) autocorrelation (Cameron & Trivedi,
considered and the effects of lengthy patenting processes are avoided. 2005). The autoregressive correlations take into account the previous
The patent classes are defined at the level of four-digit international values for each patent class. Since the error structure is specified for
patent classification (IPC) codes. Notably, this measure covers dis- each patent class, the specified model is a panel regression model that
ruptive innovations as well as non-disruptive ones; since citing prior takes into account the heterogeneity among patent classes. The Probit-
innovations is not a requisite for becoming a dominant design, the in- regression model can be expressed as follows:
novation only has to receive forward citations, or more specifically, be Yit∗ = β'Xit + uit (1)
cited by subsequent patents.
Yit∗ i s
an unobserved latent variable. The observed random variable
Yit is defined by:
3.2.2. Independent variables
Innovative performance is measured as the patenting frequency of 0 if Yit∗ ≤ 0,
each patent class. It is calculated as the number of patent applications in Yit = ⎧ ∗
⎨
⎩1 if Yit > 0. (2)
a given year (Ahuja & Katila, 2001, Hall & Ziedonis, 2001; Keil, Maula,
Schildt, & Zahra, 2008; Stuart, 2000). Xit is a vector of the independent, interaction, and control variables
Globalization is measured as the number of countries where the and uit is an autocorrelated fixed effect for the ith patent class as follows:
applicants of patents are located for each patent class in a given year. uit = ρ ∗ uit − 1 + ηit ; η is iid (0, ση2) (3)
Thus, the number of countries involved in the invention process is
measured and not the diffusion of the innovation or global market
reach. 4. Results
Science base is measured binarily as whether a technology is sci-
ence-based according to Pavitt (1984) taxonomy as described above. The mean values, standard deviations, and correlations among the
The IPC technology codes in the data set are converted to Nomenclature variables used in the analyses are reported in Table 1. The high cor-
of Economic Activities (NACE) industry codes of the European Com- relations among the independent variables could be an indicator of
munity (Schmoch, Laville, Patel, & Frietsch, 2003), and then from multicollinearity. Therefore, related statistics are examined; for

Table 1
Descriptive statistics and correlations.
Mean S.D. 1 2 3 4 5

1. Dominant design 0.003 0.052

2. Innovative performance 337.513 744.649 −0.023**
3. Globalization 16.349 8.538 −0.067** 0.707**
4. Science base 0.348 0.476 0.011 0.276** 0.178**
5. Market-based financial system −0859 0.913 −0.017** 0.227** 0.403** 0.106**
6. Central bank assets to GDP 3.830 1.639 0.013 0.193** 0.264** 0.145** 0.419**

n = 14528.
** Correlations significant at the 5% level.

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performance (β = 0.001; p < .05; Model 3, Table 2). In Fig. 3, the

positive moderating effect is plotted—there is more likely to be a
dominant design at lower values of globalization combined with lower
values of innovative performance, and when innovative performance is
higher, globalization has less impact on the relationship between in-
novative performance and dominant design.
To study the impact of the independent variables before and during
the great crisis, the regressions including only data for the patent class
years before 2008 (Model 4, Table 2) and then from 2008 onwards
(Model 5, Table 2) are repeated. It is observed that the coefficient for
innovative performance is less negative after 2008 (β = −0.067;
p < .05; Model 5, Table 2) compared to before the great crisis
(β = −0.109; p < .05; Model 4, Table 2). The interaction of in-
novative performance and globalization is significant both before and
during the great crisis (β = 0.001; p < .05; Model 4 and Model 5,
Table 2). The moderating effect of globalization is therefore plotted
against the relationship between innovative performance and dominant
Fig. 1. Scatterplot of innovative performance against year. design before and during the great crisis, respectively. In Fig. 4, it is
found that for the period before 2008, the globalization of innovation
example, the variance inflation factors (VIFs) are under 2.10, and the moderates the negative relationship between innovative performance
tolerance is over 0.47, and thus do not indicate multicollinearity and dominant design so that innovative performance has less impact on
(Kutner, Nachtsheim, & Neter, 2004). dominant design when globalization is high. High values of globaliza-
Fig. 1 shows the innovative performance plotted against the year. tion before the great crisis thus greatly reduce the emergence of
All classes are plotted, and overlaps are not differentiated. A sharp rise dominant designs, particularly for patent classes with low innovative
of innovative performance in the late nineties seemed to peak in the performance. The effect is similar to that of the whole sample, but more
early 2000 s, only to later slope downward. pronounced when only the period before the great crisis is observed. In
Globalization is plotted against the year in Fig. 2, and appears to Fig. 5, the period following 2008 is shown, and the moderating effect of
increase steadily until around 2008, after which this variable assumes a globalization is reversed so that higher levels of globalization are more
downward slope. conductive to dominant design, and even more so for lower levels of
Table 2 reports the results of the Probit-regressions. First, whether innovative performance. This supports Hypothesis 2.
there is a structural break in the data for dominant design is tested. The In reference to Table 2 and the comparison between the pre- and
significant coefficients for the variables “great crisis” (β = −1678.076; post-break models, the difference for science-based industries is striking
p < .05; Model 1, Table 2) and the “year of great crisis” (β = 0.835; with no significant impact in the years before 2008, and a significant
p < .05; Model 1, Table 2) indicate that there is such a break. The impact during the crisis (β = 0.804; p < .05; Model 5, Table 2). This
coefficient of “great crisis” is negative and significant also when in- supports Hypothesis 3. Further investigation is carried out into which
cluding the independent and control variables (β = −2964.373; these technologies are, and it is found that science-based technologies
p < .05; Model 2, Table 2) and when adding the interaction between with dominant designs before the great crisis included chemical sub-
globalization and innovative performance (β = −2946.147; p < .05; stances such as attack gas and working-up tar. In the aftermath of the
Model 3, Table 2). The Probit-regression analysis hence supports crisis of 2008, these technologies are joined or replaced by digital
Hypothesis 1 regarding the negative impact of the great crisis on the technologies such as counting mechanisms (G06M), ciphering appa-
emergence of dominant design. There is a positive impact of the vari- ratus (G09C), and electricity modulation (H03C). There appears to be a
able year of great crisis (β = 1.466; p < .05; Model 3, Table 2), and tendency favoring more digital technologies with dominant designs.
thus, there is a higher probability of dominant designs when more years To test the robustness of the results, a time-lag analysis is con-
have passed since 2008. In addition, model 3 demonstrates the negative ducted: shown in Table 3. An investigation into whether there is an
impact of innovative performance on dominant design and a moder- impact of the independent variables on dominant design in the same
ating effect of globalization as indicated by the significant interaction year is conducted, as the independent variables are measured (model
variable between innovative performance and globalization 6), the year after (model 7), two years after (model 3), and three years
after (model 8). The results of model 3 are repeated in Table 3 to fa-
cilitate comparison between the models with different time lags. When
time lag is applied (model 6), the model varies from the original model
with a two-year time lag, with a significant negative relationship be-
tween globalization and dominant design (β = −0.931; p < .05;
Model 6, Table 3). The results of the models with one-year time lag
(model 7), two-year time-lag (model 3) and three-year time lag (model
8) are similar, with reference to the sign and significance of coefficients,
with the Wald χ2 of the model with two-year time lag being slightly
higher than in the other models. The time-lag analysis thus demon-
strates the robustness of the obtained results and further shows that the
results endure through time, so that a change in the independent
variables of one year has an impact on the emergence of a dominant
design during subsequent years.

5. Discussion

The focus of this paper has been to evaluate the effects of the great
Fig. 2. Scatterplot of globalization against year. financial crisis on innovation using the concept of dominant design as

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Table 2
Probit-regression results on dominant design.
Model 1 2 3 4 5
Pre break Post break

Innovative performance −0.052** −0.068** −0.109** −0.067**

(0.015) (0.018) (0.043) (0.021)
Globalization −0.070 −0.062 −0.119 0.061
(0.049) (0.048) (0.089) (0.053)
Innovative performance × Globalization 0.001** 0.001** 0.001**
(0.000) (0.001) (0.000)
Science base 0.362** 0.368** −0.014 0.804**
(0.168) (0.170) (0.245) (0.279)
Great crisis −1678.076** −2964.373** −2946.147**
(462.479) (762.111) (765.608)
Year of great crisis 0.835** 1.475** 1.466**
(0.230) (0.379) (0.381)
Market-based financial system −0.127 −0.122 −0.107 −0.147
(0.086) (0.087) (0.092) (0.353)
Central bank assets to GDP −0.013 −0.011 −0.024 0.098
(0.045) (0.045) (0.064) (0.062)
Constant −2.924** −1.574** −1.499** −0.776** −1.719**
(0.075) (0.320) (0.321) (0.388) (0.534)
Model diagnostics
Wald χ2 (df) 72.00** 100.60** 98.56** 33.79** 20.79**
n 14,528 14,528 14,528 13,166 1362
Patent classes 454 454 454 454 454
Years 32 32 32 29 3

*Estimates significant at the 10% level.

** Estimates significant at the 5% level.

Fig. 3. Interaction between innovative performance and globalization. Fig. 5. Interaction between innovative performance and globalization during
the Great Crisis.

Finally, this study further evaluated the evolution of dominant designs

in science-based industries.
The results validate the first hypothesis about the negative impact of
the great financial crisis on the emergence of dominant design.
Convergence towards dominant designs is apparently less frequent in
long and difficult financial crises: there have been fewer innovations,
and especially fewer disruptive ones, than before. It may seem coun-
terintuitive as the world seems to be changing faster than before, but
actually it is probable that without a financial crisis as deep as the great
financial crisis in 2008 there would have been more radical innovations
than today.
These findings further support the established results of existing
studies which have shown an interruption or deceleration of innovation
Fig. 4. Interaction between innovative performance and globalization before investments from companies, mostly for financial reasons, because of
the Great Crisis. the financial crisis of 2008. As indicated by El-Erian (2010), the great
financial crisis has also been a time where many companies have shown
less willingness to take risks. The same comment can be made about
the primary indicator. Additionally, due to the fact that the financial
banks which have refrained to invest in innovative firms because of the
crisis happened at a time where companies had significantly inter-
risk of capital loss, even if the liberalization of financial markets has
nationalized their R&D activities, it has been important to examine the
reduced their market power. As noted by Brogaard, Ngo, and Xia
consequences of globalization on dominant designs during this period.
(2019), bank loans are still the most important source of corporate

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Table 3
Probit-regression results on dominant design with varying time lags.
Model 6 7 3 8
no lag 1-year lag 2-year lag 3-year lag

Innovative performance −0.084 −0.098** −0.068** −0.073**

(0.057) (0.024) (0.018) (0.019)
Globalization −0.931** −0.022 −0.062 0.005
(0.155) (0.054) (0.048) (0.049)
Innovative performance × Globalization 0.001 0.001** 0.001** 0.001**
(0.001) (0.000) (0.000) (0.000)
Science base 0.124 0.291* 0.368** 0.321*
(0.229) (0.174) (0.170) (0.175)
Great crisis 419.636 −2383.928** −2946.147** −2753.847**
(345.660) (743.105) (765.608) (785.432)
Year of great crisis −0.208 1.186** 1.466** 1.371**
(0.172) (0.369) (0.381) (0.391)
Market-based financial system −0.031 −0.064 −0.122 −0.089
(0.104) (0.086) (0.087) (0.091)
Central bank assets to GDP −0.074** 0.065* −0.011 −0.007
(0.029) (0.037) (0.045) (0.481)
Constant 1.724** −1.561** −1.499** −1.886**
(0.425) (0.315) (0.321) (0.338)
Model diagnostics
Wald χ2 (df) 83.00** 93.78** 98.56** 93.07**
n 15,436 14,982 14,528 14,074
Patent classes 454 454 454 454
Years 34 33 32 31

** Estimates significant at the 5% level.

* Estimates significant at the 10% level.

finance, far more significant than funds raised in the equity market. Another possible explanation is that companies with more interna-
There has been an increased reluctance to engage in risky disruptive tional and open-innovation strategies have a higher tendency of aban-
innovations that would form entire industries and generate new doning innovative projects (Tranekjer, 2019). Finally, the rising im-
dominant designs. Still, an increasing probability for emerging domi- portance of frugal innovations might also be a key influence: products
nant designs associated with the year of the crisis, is identified. This from emerging markets are not only increasingly sold in Western
could be indicative of a recuperation from the crisis in these years. markets, but also being developed in Western markets by Asian com-
A complementary explanation for the diminishing emergence of panies (Agarwal, Grottke, Mishra, & Brem, 2016).
dominant designs in this period could be the fact that a company may The direct negative relationship between globalization and the
set an industry standard in the sense of a dominant design with only emergence of dominant designs that appear when no time lag is ap-
limited intellectual property rights (Brem, Nylund, & Schuster, 2016). plied, could be due to reverse causality; for example, the emergence of a
An example of the contrary effect comes from the dot-com boom of the dominant design may reduce the geographical spread of innovation
1990s, which was a period characterized by risk-willingness which regarding a certain technology. Since, with time lags, the dependent
generated many innovations, as evident by the high innovation per- variable is measured after the independent variables, and other reverse
formance of this period as per Fig. 1. The following battles for dominant effects are avoided and the ability to infer causality in the tested re-
design eliminated competing technologies and led to the bankruptcy of lationships is improved. As global innovation also leads to a global
many of those risk-willing firms, thus leaving behind fewer firms and competition of standards, it also explains the longer time period until a
more dominant designs (Day, Fein, & Ruppersberger, 2003; Teece, dominant design can be set.
2006). In addition, it is important to note that other factors can also Finally, regarding the third hypothesis, it is found that science-
influence the probability of a firm to take risks. For instance, the recent based industries were more likely to have dominant designs during the
period of very low or even negative interest rates might lead to a higher financial crisis as there was a reduction of emergence of dominant
probability of funding risky endeavors. designs in other industries. For the period before the financial crisis, it
These findings further support the second hypothesis about the is not clear that such a difference between the different types of in-
moderating impact of globalization on the relationship between in- dustries existed.
novative performance and the emergence of dominant design. It is One possible explanation is that science-based technologies are
found that globalization is more important to the establishment of better at taking advantage of new connectedness—particularly with
dominant designs than it was before the financial crisis of 2008. regard to digital technologies—and to accelerate the diffusion of a ra-
One possible explanation for this phenomenon is that companies are dical innovation in order to turn it into a new dominant model. For
increasingly able to connect and take advantage of international example, science-based technologies may approach standards through
knowledge, so that globalization has become an advantage rather than gradually including knowledge and product features in platforms
a hindrance. In that case it could contribute to the observed increase in available to partners and customers (Bharadwaj, Sawy, Pavlou, &
the gap between international companies and local firms which took Venkatraman, 2013) and then turning their innovations into a “de
place during the great financial crisis; the former ones could have ex- facto” standard with the help of a network effect (Gawer & Cusumano,
perienced a relative acceleration of innovation compared to the latter 2014).
ones. It is possible that the globalization of innovation is one of the Another explanation for this might be the fact that this study ex-
many causes of growing economic inequality—with its socio-political plored patents, which are intellectual property rights for technical in-
implications more than obvious—that is associated with the great fi- ventions. Hence, there is a natural linkage between science-based
nancial crisis (Dabla-Norris, Kochhar, Suphaphiphat, Ricka, & Tsounta, technologies and dominant designs. Moreover, science-based technol-
2015). ogies usually offer a high growth potential, which attracts investors

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who want to support the commercialization of the technology for their duration and the roughness of such a crisis. Schumpeter (1942) has
success. Therefore, these investors also have an explicit interest in the noted that large companies eventually win the competition against
fast diffusion of a standard into a dominant design as a basis for new entrepreneurial firms as they derive benefits from organization and
product development. Finally, one can assume generally higher pa- bureaucracy. King and Tucci (2002) and Chesbrough (2003) have also
tenting activity of such science-based technologies. found that incumbents are more likely to survive in the long term.
An alternative explanation could be that for technologies that were Companies must strengthen their financing with strong and effec-
not science-based, the flexibility and dynamism required for innovation tive management of their financial liquidities in order to be able to
processes in the financial crisis were no longer consistent with tech- finance the deployment of their innovation even if external credits are
nology standardization. Perhaps the advantages of innovation speed difficult to find. This is demonstrated by the fact that it is not coin-
and launching into new technologies and areas (Leiponen & Byma, cidental that the most valued digital companies also have some of the
2009), counteracted the advantages of standardization for technologies largest cash reserves available. They use it to finance the development
that were not science based. of innovations and then to convert such innovations into dominant
design. Innovative companies also need to make sure that they have a
6. Limitations, managerial implications and future research lean innovation system so that they can experiment and adapt to in-
novations quickly and inexpensively in the market or in the environ-
As with every study, this research process has several limitations. ment.
First, a distinctive definition of the financial crisis has been used—- Another way to spread costs and to accelerate the adoption of dis-
specifically, ‘years’ were the primary variable—whereas it could be ruptive innovation is to make alliances in the development and diffu-
otherwise defined; for example, in terms of growth in turnover, or with sion of said innovation. Therefore, another implication of this research
the use of some other variable. Future research could consider whether is that international alliances can be an effective method of turning
the crisis should be defined differently depending on the industry or innovation into a dominant model when a crisis strikes.
country being examined. Finally, an implication for technology- and science-based companies
Another limitation stems from this paper’s definition of independent is that they should aim to globalize as soon as possible in order to turn
variables; innovative performance or globalization could also be ana- their innovation into the dominant standard. Thus, they should con-
lyzed with alternative measures. Using patent data excludes those in- sider scaling their innovation in terms of production and commercia-
novations that are not protected by patents but through other measures lization at an early stage in the innovation process rather than con-
such as secrecy, or being first to the market (Leiponen & Byma, 2009). sidering it before a financial crisis strikes unexpectedly.
With the rise of highly dynamic platform markets, an increasing This research is the first of its kind to consider the consequences of
number of small firms have become involved in complementary in- an economic crisis—and actually one of the most comprehensive stu-
novation. Large firms, such as the platform owners, protect their in- dies—on innovation through its consideration of the emergence of
novations through patents, as evidenced by their many patent litiga- dominant design as an indicator for the acceptance of disruptive or
tions (Trappey et al., 2016). Small firms struggle to benefit from radical innovation within the market. While more is now known about
patenting as well as from open innovation (Brem, Nylund, & Hitchen, the impact of the great financial crisis on dominant designs, the dis-
2017). They thus rely mainly on versioning, early entry, and other in- cussion of this study’s findings illustrates that more research is indeed
formal mechanisms (Miric, Boudreau, & Jeppesen, 2019). An aspect of needed. Within the potential avenues of further investigation exists a
the increasing impact of science-based innovations on dominant designs better understanding of intellectual property’s role in the emergence of
could possibly be explained by other fields increasingly using different dominant design for radical innovation, a more detailed knowledge of
forms of intellectual property protection. Future studies might consider how globalization affects the dominant design strategies of MNEs, and a
if, and how, the protection of intellectual property has changed due to deeper comprehension—and maybe a reconceptualization—of how di-
the financial crisis. gital technologies affect the emergence of a successful dominant design
Likewise, the use of European data limits the generalizability on a in comparison with other industries.
global scale and opens a space for additional research on global inter-
actions and their impact on dominant design. For example, the possible Funding
increase of Asian innovation and its effects warrant further studies, such
as whether Asian innovation is a substitute or a compliment to This research did not receive any specific grant from funding
European innovation. Another limitation is our view on dominant de- agencies in the public, commercial, or not-for-profit sectors.
signs. There are clearly ambiguities in the literature, with dominant
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1131–1146. Institute of Political Sciences, Paris. Eric Viardot has published various books and articles
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