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The upshot of a bad economy: Recessions spur tech innovation

Tech innovation accelerated during the economic recession of 2008, and 2023 will be no different. Industry watchers predict where the R&D dollars will go.

The tech industry has pulled back spending to brace for a possible recession in 2023. But if history repeats itself, there could be a silver lining to the economic downturn: an uptick in tech innovation.

The Great Recession in 2008 brought on 4G LTE mobile broadband, when only 30% of US households owned a smartphone. Most economists predict a recession this year. Tech industry watchers predict it could drive innovation in 5G Industrial IoT, connected intelligence, autonomous systems and quantum computing.

In his keynote during the Consumer Electronics Show (CES) last week, Steve Koenig -- vice president of research at the Consumer Technology Association -- said he expects to see innovations in those areas to solve pressing problems, such as worker shortages.

"Yes, there have been tech layoffs. But across the global sector, businesses are struggling to find workers," Koenig said. "Tech innovation can help with that."

Robotics in manufacturing and driverless truck technology is moving forward to fill the truck driver gap. At CES, John Deere revealed autonomous tractors -- a harbinger of more innovation to come.

A unique recession

Companies that continue to invest at higher levels than their competitors during recessions tend to see stronger persistency in the market, said Christopher Gilchrist, an analyst at Forrester Research.

"The uniqueness with this downturn for the tech industry resides with the simple fact that, at the maturity levels these tech firms are at today, they have never truly been through a full economic cycle," Gilchrist said. "Most of these firms were still in early-stage, high-growth modes leading into the financial crisis."

Economic recessions result in technology innovations.
The Great Recession in 2008 brought on 4G LTE mobile broadband. A 2023 recession could drive innovation in 5G, connected intelligence, autonomous systems and quantum computing.

This naturally put less shareholder pressure on them to maintain near-term profitability targets at the expense of longer-term growth as their business models were still maturing, Gilchrist said. R&D between 2000-2010 remained elevated compared with other R&D-intensive industries, and these firms experienced growth that exceeded that of the general market post-recession, he said.

During the COVID-19 pandemic, tech-forward business models made gains in the market. Others were left to reshuffle amid shutdowns and manage drastic shifts in consumer behavior, Gilchrist added.

Market correction will pick up pace this year, putting pressure on near-term profitability. The question now becomes, "At what cost to longer-term growth will this pressure have on tech firms?"

Massive tech companies such as Salesforce, Microsoft, Google and Amazon recently cut costs by way of hiring freezes, layoffs and restructuring, and will continue to cut where margins are low. These strategic cuts reduce shareholder pressure while allowing companies to maintain their positions in the market, analysts said.

R&D continues, with caveats

While the days of relatively cheap capital and big bets on unsustainable business models are over, investments in tech innovation continue -- albeit in a more controlled manner.

Tech companies have adjusted their spending patterns. Investments are driven by constraints, regulations, and lessons learned in areas such as crypto currency and security issues, said Seth Robinson, vice president of industry research at CompTIA, a nonprofit association for the IT industry and workforce.

"Nothing douses the flames of innovation; it just changes," he said.

Research and product development are long-term investments and analysts expect tech firms to continue spending, with a few caveats. The first being that R&D will be pragmatically pointed to high-margin segments, Gilchrist said.

"R&D efforts will target opportunities that can expand existing markets instead of targeting opportunities that would extend new markets," he said. "Capturing growth from stable markets is far more prudent than creating growth from unstable markets."

In other words, R&D will funnel into hot markets, such as security, cloud and AI, instead of on newer markets that have yet to prove lucrative. Tech industry leaders at CES reiterated the need to invest in those areas to drive business forward.

"Anyone who ignores those megatrends will find themselves falling behind," said Nasdaq Chair and CEO Adena Friedman during a session at CES.

Innovation ensures competitive advantage

There is a strong business case to maintain R&D intensity through the economic downturn, and tech firms with high margins and cash reserves will continue to do so, Gilchrist said.

"Cash may no longer be 'cheap,' but these firms are sitting on a lot of it. Not putting that money to work would only prolong the impact of this impending downturn," he said. "Forgoing opportunity today will cost much more tomorrow."

Forgoing opportunity today will cost much more tomorrow.
Christopher GilchristAnalyst, Forrester Research

In many cases, it will be up to IT leaders to convince business execs to invest more into strategic technologies -- a particularly difficult task in organizations that still view IT as a cost center rather than a profit center.

"Technologies that improve competitive advantages is where companies will need to continue to invest," Robinson said.

Though recent headlines put a spotlight on tech company layoffs, the big picture shows that companies continue to invest in hiring IT professionals who can drive innovation initiatives.

CompTIA reports that 30% of all tech jobs postings are for positions in emerging technologies, such as artificial intelligence, or in roles requiring emerging tech skills.

Microsoft, Intel, IBM and Cisco did not provide comment on tech investment plans.

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