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Transcript: Is it better for companies to cut back or invest during a recession?

This Is Karl Moore of the Desautels Faculty of Management at McGill University with Talking Management for The Globe & Mail. Today I am delighted to sit down with Ioannis Ioannou from the London Business School.

During the great recession what's the best strategy. It seems we may be back, in some parts of the world, in a recession. What is the appropriate strategy going forward according to your research?

IOANNIS IOANNOU - So Karl this is a paper that I am working with Caroline Flammer who is at Ivey, and we wanted to understand whether companies actually invest or save their way out of a recession. You can see there are arguments both ways, right? You can say, well, during a recession there is uncertainty, there is a liquidity constraint and therefore some companies are likely to entrench, postpone some projects, fire or lay-off people and so on, but others might say, "Yes, but a crisis is also a situation in which equity prices and asset prices come down," so perhaps companies will invest.

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So, particularly this crisis which is a financial crisis, the great recession of 2007-2009, we used that kind of data to see what the U.S. companies did. So the big finding in this paper is that, as perhaps people would except, companies on average did diminish their labour force and reduce their capital expenditures. However, they did not, they maintained their investments in innovation capability, in terms of R&D, and in terms of stakeholder relations, in other words in terms of CSR. So we called this paper "The Dog That Didn't Bark" exactly because the non-finding, the maintenance of this strategic investment, was an important finding. Now the companies that did not reduce R&D and stakeholder relations investments, CSR investments, they are the ones that did much better following the crisis.

MOORE – So what do you attribute this to?

IOANNOU - It's all about intangible resources, summarized by innovation capability and stakeholder relations. We argue that those kinds of rescues are particularly important during a crisis for three reasons. One, they enable firms to become more efficient and creative. Second, they enable firms to become more adaptive during times of crisis. Thirdly, they enable organizations to be more resilient during times of crisis.

You can see that these three attributes are particularly valuable and useful during a crisis because a crisis is a situation in which you have disruptions in the entire business environment. So it's not like an industry technological evolution, this is a much grander crisis. It introduces major uncertainly, it disrupts relationships not only with customers but with a range of stakeholders and a companies experience economy wide, a huge drop in consumer demand which might create excess capacity and therefore inefficiency within companies.

So those are the sort of three mechanisms, so efficiency and creativity, adaptation and organizational resilience. We argue that intangible resources are particularly valuable in those three respects.

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