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•I analyze US firms’ R&D activities over the business cycle.•Results indicate that R&D activities conducted during past recessions improve a firm’s ability to innovate during new downturns.•R&D activities conducted during non-recession years do not have the same effect.•Past experience with innovation during recessions is also beneficial to patent outcomes after a new recession.
Innovating in downturns can affect corporate success by improving a firm’s position relative to competitors during the recovery period. However, increased uncertainty and more binding financial constraints complicate such innovation activity. I find that past experience with innovation during recessions improves a firm’s ability to invest in R&D when a new downturn hits. This result holds controlling for traditional drivers of innovation as cumulated innovations and financial constraints, as well as mitigating endogeneity and selection concerns. Moreover, I find that past experience with innovation during recessions is beneficial to patent outcomes after a new recession. Overall, the paper provides novel evidence on how business cycles shape innovative capabilities.