How the crisis could prompt innovation

May 11, 2020

Sections Strategy Video

Collections COVID-19 Crisis

Ordinarily, companies’ preoccupation with profits means long-term investments and big questions get pushed back. But few companies are profitable right now, which makes this an ideal time for businesses to invest in innovation and make sure they're well-positioned to emerge from the crisis, says Chicago Booth’s Haresh Sapra.

Video Transcript

This is a time in the world economy where we’re facing a lot of uncertainty. But I view this as a silver lining in the sense that this provides an opportunity for companies to look at their business models and essentially figure out what type of decisions they should be making.

Most companies are essentially bleeding and generating losses. Therefore, this is the time where they could look at decisions that require a lot of upfront investment, such as R&D or engaging in innovative activities—these activities that get cut back when they are worried about generating profits.

Why not look at the important decisions that they’d be essentially postponing and start getting their employees to think about them? Most of the employees are working from home, away from all the distractions of the office, so why not use that opportunity to look at decisions that have been postponed that require large investments? Shareholders are going to be willing to tolerate this type of risk at this moment. So in my mind, this is an opportunity that companies should be looking at.

In terms of the accounting, essentially all of this would be recognized as R&D expense, and I don’t think their share prices would be hurt as much. So I think companies realize it, and going down that path is going to help them. They’ll emerge from the crisis perhaps in much better shape than they think they are in right now.

I think in the policy debate, the CARES Act is going to be very helpful. I think this is a move in the right direction. I also believe that the banking regulators providing capital relief to banks is a move in the right direction.

We need to be very patient in terms of how we deal with this crisis in the sense that executives and managers need to be given time to work on these issues, resolve these issues. And if the regulators come out with a unifying message that this is a short-term crisis, and it will go away, and we’ll emerge much stronger, I think the economy will do much better in the future.