During periods of recession, companies face two options: they could either retrench in order to try and save their way out of the recession or invest their way out of a recession. Which one should they choose and why? An expert explores.

Companies should choose the latter by investing in their intangible resources in the form of innovation capability and stakeholder relations, advises Dr Ioannis Ioannou, assistant professor of Entrepreneurship and Strategy at London Business School, based on his research with C Flammer of Ivey Business School.

“During the Great Recession, companies in the US significantly reduced their workforce and capital expenditures. Yet, and this is the remarkable finding, they maintained the same level of investments in R&D and CSR,” said Dr Ioannou, as he addressed alumni at an event at London Business School’s Dubai Centre.

“This result is a ‘non-barking dog’: the interesting finding is not so much what companies did, but rather what they did not do: they did not cut back on R&D and CSR investments, despite the cost-cutting pressures and other disruptions that are inherent in periods of recession.

“Therefore, by maintaining their investments in intangible resources during turbulent times, companies can become more adaptable to shifting stakeholder demands and expectations that are brought about by the crisis, and they can fall back on their organisational resilience to buffer the adverse conditions that are prevalent during recessionary times,” said Dr Ioannou.

“Efficiency and innovation, adaptability, and organisational resilience, are the underlying processes that are reinforced by maintaining strategic investments in intangibles and hence allow organisations to invest their way out of a downturn. For example, investments in stakeholder relations enable companies to obtain timely, relevant and accurate information thus, they are more likely to take better informed decisions, and tackle the pervasive uncertainty during the crisis. When it comes to innovation capability, finding novel ways to do more with less and to maintain or even increase firm value without unnecessarily risking firm survival is vital," Dr Ioannou explains.

“If you explore how companies fared after the recession in terms of their return on assets or their net profit margins, you find that the ones that did not reduce R&D (i.e. innovation capability) and did not reduce CSR (i.e. stakeholder relations) investments, did significantly better in the recovery period,” said Dr Ioannou. “You cannot just have CSR activities in good times and then forget about them in the bad times and hope to get any results.”

Speaking about the current situation in the UAE and how companies here can benefit from these insights, he said: “Interestingly, the current situation in the region, because of the oil prices, does resemble in some ways the situation of a major economic crisis. I believe that saving, retrenching and becoming more conservative in terms of investments do not appear to be the way forward, in fact, quite the reverse.”

“This is particularly important for industries in which innovation capability and stakeholder relations are key drivers for firms' competitive advantage. Such industries should not cut their investment in those intangible resources. It is sometimes easy to make the argument that these are the ‘soft’ issues - and therefore the first thing to go during a crisis is the company's CSR program. However, as our research suggests, that is not the how a company will do better after the recession.

“Our overarching argument is that firms’ investments in strategic resources need to balance the development of sustainable competitive advantage in the long term with the adaptation to short-term business disturbances,” said Dr Ioannou.

“So my suggestion is that in the UAE, these three underlying processes - efficiency and innovation, adaptation and organisational resilience – should be the focus of policies and potential regulations when attempting to help the business environment or the business community to overcome any crisis or a major economic adjustment.” – TradeArabia News Service