Coping the Recession

PA Geroski and P Gregg*

Introduction fat’ will expect to find that the most able firms have
The UK economy has suffered through two deep weathered its storms with relative ease, and that such
recessions over the last decade and, as a consequence, its firms have been able to increase their control over costs
productive structure has undergone a major transform- and bring forward major investments in plant and equip-
ation. The most visible consequences of these events ment, training and I~~I~. By contrast, those who fear
include two waves of large scale job shedding (with pro- that the recession has ’cut into muscle’ expect to observe
foundly different regional impacts) accompanied by per- firms making short-sighted decisions to control costs,
sistently high unemployment throughout the 1980s and and postponing or abandoning major strategic invest-
ments in technological, human and physical capital
early-1990s. This time period has also seen steeply rising
small and large firm failure rates, a major reshuffling in which promote long-run competitiveness.
the ownership of many businesses, severe imbalances This note reports the results of a large scale survey of
between the supply of and demand for certain types of how large UK firms are coping with the recession that
skills exacerbated by regional immobilities in labour, a was undertaken jointly by the National Institute and the

crisis of consumer confidence coupled with a reluctance Centre for Business Strategy at the London Business
by consumers to take on (or add to) their long-term debt, School. Using responses from more than 600 firms to a
and a general decline in the authority and confidence long and fairly detailed questionnaire, we have been able
with which demand management policies have been to gauge how severely firms have been affected by the

pursued. recession, and identify the parts of their operations which

Some observershave, however, argued that the longer- have been most affected. We start our report by describ-
run consequences of recessions may be positive. In par- ing the questionnaire and sampling frame which we used,
ticular, selection pressures created by falling demand analysing the response rate and assessing the representa-
help to weed out weak firms, while stronger firms are tiveness of our sample. In the third section we describe
induced to bring forward productivity-increasing invest- the perceptions which firms hold of the current recession,
ments to help maintain their competitive position.(’) The and those parts of their operations which have been most
result is that those firms who survive a recession are, it is severely affected by it. The data show clearly that some
thought, ’leaner and fitter’ , and more able to take advan- firms have been more severely affected than others, and,
tage of new growth opportunities. Those who find this in the following section, we try to identify some of the
view persuasive often attribute the well known pro-cycli- major differences between those who have been severely
cality of productivity to the reorganisation of firms and affected and those who have not. We then catalogue the
markets brought about by severe adversity, and they are, responses which firms have made to the circumstances
as a consequence, inclined to view recessions as an inte- that they find themselves in, and try to identify which
gral part of the process by which economies grow and type of firm made which type of response. We summarise
develop. The question of whether recessions have a posi- the links which we have uncovered between the pre-
tive impact on an economy’s long-term growth potential recession characteristics of firms and their responses to
is difficult to answer with any confidence, and it will take the recession in the final section, and then speculate
some time before a consensus emerges about whether the about the likely evolution of the economy in the medium
two recent recessions in the UK have been, on balance, term.

beneficial. It is, however, possible to begin forming an

opinion on these issues by examining what has happened The recession survey
to during the current recession, and how they have
firms The 15 page questionnaire which formed the basis of our
responded to recession-induced pressures. Those who see survey contained 32 detailed questions, and provided
the recession as having had the effect of ’cutting out the space for respondents to elaborate on their answers. The
*
We are obliged to all of the companies who participated in the survey whose answers are reported here, to Thibaut Desjonqueres for able
research assistance, to Andrew Britton and Nick Oulton for helpful comments on an early draft, and to the Gatsby Foundation and the Centre for
Business Strategy for financial support. The usual disclaimer applies.

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questions were divided into three sections: ’The Effects of non-responding firms was almost identical to that of
the Recession’ , ’Human Resource Management’ and responders, and both distributions were also similar
’Company Organisation’ . The first section asked firms when size was measured in terms of employment. The
about how severely they were affected by the recession, industry breakdown of responding firms was broadly
how severely it affected various elements of their trading representative of that for the economy as a whole, alth-
position, what their major problems had been, and it ough we appear to have a slight over-representation of
included three detailed questions about how they have engineering firms and a slight under-representation of
responded to the recession. Their answers to these quest- retailing firms. Using the EXSTAT database, we
ions will be the major focus of our interest here. The extracted data on pre-recession l~c~I7 spending, sales,
remainder of the first section of questions elicited infor- profits and debt structure for those firms who responded
mation on the competitiveness of their product market, to our survey and compared these with similar figures for
the second section asked a number of detailed questions non-responders. It is difficult to detect any major differ-
about their workforce composition and pay arrange- ences between responders and non-responders in R&D
ments, and the final section asked a number of questions intensity or pre-recession growth rates. However,
about company structure and ownership. In the main, we responding firms were slightly more profitable than non-
shall use some of the responses to these other questions as responders, and their degree of debt was a little bit lower.
control variables to help identify the responses of differ- One further sub-group of firms deserves consideration,
enttypes of firms. and that is those who ceased to trade as independent
The survey was carried out in theSpring of 1993, companies during the recession. In all, some 139 compa-
following a pilot study testing the questions on a sample nies in the original sample ceased to trade independently
of 70 firms conducted in October 1992. The first set of during this period: 84 were taken over and 55 went into
questionnaires were mailed out in December 1992, and receivership or liquidation (for the population of UK
293 completed replies were received by early February. firms as a whole, the failure rate was about 5 per cent,
Two follow up mailings were undertaken in early Febru- twice that in our sample). In addition, 31 companies were
ary and late March, yielding 170 and 155 further usable untraceable (either because we failed to find an address,
responses. The sampling frame was the EXSTAT data- or because the address which we used was incorrect). The

base of large mainly quoted UK companies. Of 2199 84 firms who were taken over were somewhat smaller
contactable companies identified as trading indepen- than survivors, but had somewhat higher sales growth,
dently in 1990 and still doing so in 1993, usable res- profits and levels of debt. More surprisingly, those who
ponses were received from 614 companies (a 28 per cent were liquidated were also profitable, and they generally

response rate). In addition, 4 responses were received experienced rapid sales growth through the mid- to
from companies who had ceased trading or were taken late-1980s. The 55 liquidated firms were, however, small
over. Of the population of 2199 firms, 2094 had com- relative to survivors, and had high levels of (and increases
pany accounts data of reasonable quality in either 1989 in) debt. They were also heavily concentrated in Con-
or 1990, and 588 of them were among the respondents struction and Business Service sectors. The 31 firms that
(again, a 28 per cent response rate). The difference we were unable to trace were large relative to survivors,
between 614 and 588 is composed of 13 responding experienced slower growth in the 1980s and were con-
companies who destroyed the identification code we used centrated in the Retail and ’Other Manufacturing’
to match the survey responses to the EXSTAT data and a sectors.
further 13 respondents had poor quality accounts data. (2) In short, the major difference between our sampling
The EXSTAT database does include some small firms, frame and the population of firms in the economy is that
but large firms are heavily over-represented: 45 per cent we have a disproportionately high representation of large
of EXSTAT firms had over 1,000 employees, while only firms and of firms in manufacturing. The major differ-
6 per cent had less than 50 employees in 1989 (for the ence between responders and non-responders is that the

economy as a whole, 13 per cent of firms had more than former appear to have entered the recession on a some-
1,000 employees and 40 per cent had less than 50). Our what sounder financial footing than the latter. Finally,
respondents employed 3.19 million workers in 1989, our limited information on firms that ceased trading

equivalent to 14 per cent of UK employment (18 per cent during the recession suggests that many of them were
if the public sector is excluded).(’) 5-1 per cent of them had smaller but more heavily indebted than respondents.
annual sales less than L5m, 11 °9 per cent had sales less They were not obviously less profitable than respon-
than £l0an, 41.0 per cent had sales less than £SOm, 61°2 dents, but many of them did grow relatively fast prior to
per cent had sales less than £100m, and 13°3 per cent had the recession. As we shall see, of all of these character-
annual sales in excess of £SOOm. The size distribution of istics, it is high debt and rapid pre-recession growth rates

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which seem to discriminate most clearly between those ted (40 per cent). Most of those who were not affected at
surviving firms who were severely affected by the all thought that the recession was over (81 per cent). The
recession and those who were not. In this sense, then, period over which we sampled ran from January to April
what we observe in our sample of survivors about vulner- 1993, and we received 293 responses by early February,
ability to the recession seems to apply in similar measure 170 responses by mid March and 152 responses by early
to non-survivors. April. The percentage of respondents who thought that
the recession would last more than a year was 50 per cent,
Perceptions of the recession 51 per cent and 42 per cent respectively over these three
Most popular discussions of the recent recession have cohorts, with 85 per cent, 86 per cent and 74 per cent
emphasised its severity, and our respondents echoed respectively stating that they believed that the recession
these sentiments. Table 1 displays the answers to two of would last longer than 6 months. This is consistent with a
the questions that we asked about the effects of the slight lifting of recessionary gloom, but it does not reflect
recession. 18 per cent of the responding firms felt that a revolutionary change in perceptions. (4)
they had been ’extremely severely’ affected by the The second question shown on Table 1 tries to identify
recession (relative to normal trading conditions), while the effects of the recession on each company’s trading
56 per cent felt that they had been ’extremely severely’ or position, offering them the opportunity to identify
‘severely’ affected. aspects of their activities which are ’seriously’ affected,
Of somewhat more interest were the 21 firms who felt ’somewhat’ affected, and ’not at all’ affected. Even a
that they had ‘not...(been affected)... at all’ . These firms cursory glance at the table suggests that the problems
had no striking identifying feature but they were dispro- created by the recession are perceived to be demand led,
portionately likely to be producing a single product, but it is a failure in domestic and not world demand
operating in ’Other Manufacturing’ and were smaller which has caused most problems for respondents. Alth-
than the population of firms as a whole. ough the recession has caused some problems associated
We also asked our sample of firms the question: ’when with excess capacity, excess inventories and cashflow
do you expect the recession to be over for your com- constraints, it seems clear that the main perceived source
pany ?’. 48 per cent believed that the recession would last and driving force of the problem is lack of domestic sales.
longer than a year (i.e. persist beyond the Spring of More than a third of the respondents were not affected at
1994), while 34 per cent felt that it would persist for all by a decline in overseas sales, excess inventory or
another 6 to 12 months. Unsurprisingly, those who were excess indebtedness, while 30 per cent were not affected
extremely severely affected by the recession were much by cashflow constraints and 20 per cent were not affected
more likely to believe that it would last longer than a year by excess capacity. Virtually all of the firms who feel that
(66 per cent) than those who were only moderately affec- they have been ’extremely severely’ affected by the

Table 1. The effects of the recession

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recession felt that they had been ’seriously’ affected by a early-1990s has been sown in the mid- to late-1980s
decline in UK sales, but 43 per cent of them cited excess merger boom.
indebtedness, 5 per cent cited excess capacity and 62 per Firms seem to be somewhat more likely to blame oth-

cent cited cashflow constraints as serious problems as ers for the problems which they encountered during the
well. recession than they are to blame themselves: 322 firms
If firms believe that their problems stem from a failure cited at least one of the four ’actions of other firms’ listed
of domestic demand, they are also likely to feel that on Table 2 as being ’very important’ . Given that the
domestic macroeconomic conditions are the major recession is perceived by the responding firms as being
source of their problems. Table 2 displays the answers due to a failure in demand and not a financial crisis, it is
which we received to the question: ’which of the follow- not too surprising to discover that only 96 of them cited

ing factors have been a source of your company’s current ’credit limits by banks’ as being ’very important’ (34 cited
problems?’ . 82 per cent of the respondents cited at least it as the only source of their problems), only 100 cited
one of the six ’macroeconomic conditions’ listed in the ’non or late payment by customers’ (33 cited only this
table, while 50 per cent cited one of the four ’actions of factor) but that as many as 231 cited ’increased compe-
other firms’ and only 29 per cent cited at least one of the tition in (their) product market’ .(6) ’Innovations intro-
five ’decisions within the firm’ factors. Unsurprisingly, duced by rivals’ does not seem to have caused important
nearly all of the ’severely’ and ’extremely severely’ affec- problems for many firms, and more firms thought that
ted firms cited macroeconomic conditions as being ’very payment problems by customers or credit limits by banks
important’. Again unsurprisingly, the two macroeco- were ’not important’ than thought that they were ’very

nomic conditions which seem to have caused most con- important’ . Since a decline in the level of domestic sales is
cern are ’low consumer confidence’ (50 per cent of the likely to induce a closer interdependence between rival
respondents thought that this was ’very important’ ) and firms scrambling for a slice of the shrinking pie, it is very
’high interest rates’ (43 per cent). Only 15 per cent of the difficult to distinguish between ’increased competition
respondents thought that either of these was ’not import- in...product market(s)’ caused by new entry or an
ant’. High exchange rates did not appear to be a major increase in imports, and that caused by a large decline in
source of concern, and, indeed, only 29 per cent of those the demand for the products of a static or declining
firms who exported at least 5 per cent of their output number of supplying firms. Our informal sense of these
cited high exchange rates as a problem. Similarly, the replies is that most of the firms in our sample who felt the
effects of the ’world wide recession’ , ’falling land/build- pressure of ’increased competition’ did so because
ing prices’ , and ’international competition’ were not demand had shifted in, and not because supply had
generally perceived to be ’very important’ by more than a shifted out.
third of our respondents, and as many as 43 per cent What is, perhaps, most striking about these results is
thought that ’international competition’ was ’not their lack of consistency with the perceptions of the
important’ .(5) recession expressed by numerous leading politicians.
The sensein which firms feel responsible for what has Although the Prime Minister and his former Chancellor
happened them in the recession is, it seems, surpris-
to have repeatedly blamed Britain’s woes on the worldwide
ingly limited. Only 184 firms cited one or more of the recession, the results of our survey suggest that the view
’decisions within the firm’ factors and only 14 of the 615 from the front was focused primarily on its domestic
respondents cited only ’decisions within the firm’ factors. origins. Perhaps more surprising is the lack of concern
Nearly half our sample (and frequently more) thought expressed by our respondents about the damage that high
that the five ’decisions within the firm’ factors were ’not exchange rates may have done to their operations. It is
important’ . Of those who did perceive internal prob- hard to know whether this reflects the existence of more
lems, ’overexpansion through merger’ was the main res- pressing problems, the timing of our survey or whether
ponse : 42 firms cited only ’expansion of the company 10-15 per cent swings in the exchange rate have truly
through merger’ , while another 58 cited this factor modest effects on the operations of most firms.
among others. By contrast, 43 firms cited ’over expan-
sion of product range’ amongst other things, 59 cited Which firms have been most affected by the recession?
’over investments in plant’ among other things, 40 cited Although few firms appear to believe that their own
’insufficient product or process innovation’ amongst actions are the major source of the problems which they
other things, and 65 cited ’poor control of costs’ among are facing in the recession, it is nevertheless the case that a
other things (20 firms cited only ’poor cost control’ ). A range of decisions made in the 1980s have left some of
significant minority of firms, therefore, thought that at them more vulnerable than others. The three factors
least some of the seeds of the problems experienced in the which seem to stand out are over-rapid growth (which,

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Table 2. The sources of current problems (or more specifically, which of the following factors have been a source of
your company’s current problems, tick as many options as appropriate)

amongst other things, helps to identify those firms who ant determinant of the vulnerability of firms to recession-
ceased trading), over-expansion through merger and ary pressures. In fact, the size distribution of responding
acquisition and, to a lesser extent, debt worries. As we firms who claimed to be ’extremely severely’ affected by
have seen, most of the surviving firms who cited ’over- the recession was very similar to that of the sample of
expansion through merger’ also cited problems arising respondents as a whole: 6 per cent of those severely
from debt, cashflow and credit limits imposed by banks. affected (5 per cent of the full sample) had sales less than
To help identify other factors which seem to be associ- £Sm, 9 per cent (7 per cent) had sales between £Sm and
ated with vulnerability to the recession (that is, to identify £10m, 31 per cent (28 per cent) had sales between £10m
firms who state that they have been ’extremely severely’ and £SOm, 25 per cent (20 per cent) had sales between
affected by the recession), we matched the survey res- £SOm and £100m and 20 per cent (25 per cent) had sales
ponses we received with information from the EXSTAT between £100m and £SOOm.
data base, and compared the characteristics of those who Several other characteristics of firms proved to have
were ’extremely severely’ affected with those of all other rather more discriminating power than firm size. Foreign
respondents. owned firms were a little less likely to be ’extremely
It is widely believed that small firms are more vulner- severely’ affected by the recession (12 per cent compared
able to recessionary pressures than larger firms are, but to 18 per cent of the full sample), and single establish-
this view receives only rather weak support from our data ment firms were also a little less likely to be ’extremely
(which is, itself, a sample of relatively large firms). The severely’ affected (11 per cent). Similarly, firms located in
only evidence that clearly supports the common view is Construction, Business Services and Retailing were
that only 6 of the 76 (i.e. 5 per cent) very large firms noticeably more affected by the recession than those in
(1989 sales in excess of £500m) report being ’extremely Energy or Chemicals, and, indeed, none of the 39 Con-
severely’ affected by the recession, much lower than the struction firms in our sample reported being ‘not...(affec-
18 per cent of all 615 respondents who reported being ted)...at all’ by the recession. Further, fast growing firms,
’extremely severely’ affected. This aside, the data pro- specialised firms (i.e. those who operated in only one
vides little reason for thinking that firm size is an import- two-digit industry), firms that do not export as much as

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5 per cent of their output and highly indebted firms were choice of organisational structure may not have much
all likely
more ’extremely severely’ affected by the difficulty in coping with prosperity, but they do seem to
to be
recession. In particular: have difficulty in coping with recessions.
~’
median levels of growth over the period 1985-9 were 22 per
Responses to the recession
cent higher in ’extremely severely’ affected companies as
compared to all respondents, while among companies who If UK industry is to emerge from the current recession
were not affected by the recession, growth rates were half as ’leaner and fitter’, then it will, in part, be due to the ways
large as those of the whole samples7) in which firms have chosen to respond to recession. To
&dquo;
48 per cent of the ’extremely severely’ affected firms oper-
emerge ’leaner and fitter’, firms must be able to prune
ated in only a single industry, as opposed to 40 per cent in
slack in their current operations in a way which raises the
the whole sample;
,~
only 12 per cent of export intensive firms were ’extremely average quality of their stocks of technological, human
severely’ affected, as opposed to 29 per cent of the low and physical capital. By contrast, the concern of those
export intensive firms; who worry that the recession may ’cut into muscle’ is that
*
22 per cent of those firms whose total debt exceeded their
total assets by more than the median amount were
recessionary pressures may lead firms to make short
’extremely severely’ affected, while only 12 per cent of those sighted cuts in their rate of technological, human and
below the median were so affected. physical capital accumulation, sacrificing longer-run
competitive ability for the alleviation of current distress.
One further characteristic of companies turned out to Table 3 shows the results of a question designed to
be highly correlated with the impact of the recession, and elicit information on the type of responses firms made,
that was company structure. In the third section of our classifying them under three broad headings: ’financial
questionnaire, we asked the companies to classify their decisions’, ’strategic decisions’ and ’cost control’. Rela-
organisational structures into the following four catego- tively few of our respondents rated ’financial decisions’
ries (plus an ’other’ category): ’functional structure’, amongst the ’very important’ responses which they made
’holding company structure’, ’divisional structure’ and to the recession, and they were rarely cited as being ’very
’divisional structure with groups and/or sectors’. All of important’ without the conjunction of other factors. Of
these types of organisational form were identified using the 232 firms who cited at least one financial decision,
familiar tree diagrams, and the holding company struc- 155 cited disposal of assets, 70 reduced their dividends,
ture was (in effect) described in the questionnaire as one 62 introduced a rights issue, 64 rescheduled debt and 68
with a corporate parent operating as a holding company increased their short-term borrowing. More firms took
that presided over a series of quasi-autonomous operat- no action in these than took actions which were
areas

ing companies. Firms that identified themselves as having ’very important’. Somewhat more frequent were
this structure proved to be surprisingly vulnerable to the decisions affecting cost control: 394 firms cited at least
recession. In particular, 35 per cent of the respondents one of these responses as being ’very important’. 184 of
identified themselves as holding companies, while 45 per them closed one or more establishments, 296 reduced
cent of those who felt that they had been ’extremely employment, 235 curbed wage growth, 194 reduced
severely’ affected by the recession described themselves inventories, 49 scrapped outdated machinery, 194
as holding companies. Put another way, 50 of the 211 1 reduced headquarters’ costs and 39 contracted out
holding companies in our data were ’extremely severely’ auxiliary services. Most important of all, however, were
affected by the recession, while only 35 of the 205 firms strategic decisions, and these were cited by almost all of
with a functional structure, 14 of the 96 of the div- the firms in our sample irrespective of how severely they
isionalised and 8 of the 74 divisionalised with groups felt the effects of the recession. Of the 432 firms for
companies were so affected. whom one or more strategic decisions were ’very import-
In short, there is something to be said for the view that ant’, 331 chose to focus on core businesses, 58 increased
many of the firms who have proved to be particularly prices, 153 changed their marketing strategy, 63 merged
vulnerable the effects of the recession were weakened
to with or acquired another firm, 89 rationalised their prod-
by some of the strategic decisions which they made in the uct lines, and 140 developed overseas markets.
mid- to late-1980s. Two particular types of decisions What is perhaps surprising is how few firms took some
seem to stand out in this respect: decisions about both the action or another. More than 30 per cent of our respon-
speed and the method of growth, and decisions about dents took no action in any of the areas on the table, and
company structure. Companies who may have lost con- the only actions which engaged the serious attention of at
trol of some of their activities through over-rapid expan- least a third of the sample were corporate refocusing,
sion and companies whose control over their activities reducing employment and reducing wages growth. Not
has been weakened by what might be an inappropriate surprisingly, firms which were ’extremely severely’ and

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Table 3. Responses to the recession

’severely’ affected by the recession were also much more Financial responses were less commonly made: amongst
likely to rate financial and cost control decisions as being the ’extremely severely’ affected nearly 70 per cent made
’very important’. Of the 344 firms in this group, 286 cited such a response, and only 40 per cent of the ’severely’
at least one cost control decision and 178 cited at least affected and 20 per cent of the rest made a financial
one financial decision as being ’very important’ . 286 of response. What is clear is that it is those firms who have
the 394 who cited cost control decisions were ’extremely been most severely affected by the recession who make
severely’ or ’severely’ affected by the recession (73 per important financial, cost control and strategic responses
cent), as were 176 of the 232 firms who cited at least one to the adverse circumstances which they find themselves
financial decision. Of the 199 firms who cited at least one in. As one moves away from the hardest hit group, it is
cost control and financial decision 163 were ’extremely financial responses that become less frequent, and then
severely’ or ’severely’ affected by the recession. By con- cost control responses. More than half of the firms in our

trast, the number of firms who were ’extremely severely’ sample regard corporate refocussing as ’very important’ ,
or ’severely’ affected by the recession that rated strategic but this seems to apply as much to those firms who are
decisions as being ’very important’ was 258, only 60 per relatively unaffected by the recession as it does to those
cent of the 432 who cited at least one strategic response. who have been ’extremely seriously’ affected.
The picture that emerges from the data is loosely con- The second sense in which there is a hierarchy of
sistent with the view that there is a hierarchy of response response to the recession is in the way in which firms
to the recession. Firms who made strategic responses concentrate their activities. By far the largest brunt of the
were more or less evenly distributed across all perceived recession appear to have fallen on the workforce, either
categories of severity of impact. Of those who were in terms of lay-offs and plant closures or reduced wage
’severely’ or ’extremely severely’ affected, more than 80 growth.(8) Inventories and headquarters’ costs have also
per cent made a cost control response whereas less than been the target of some cost cutting exercises, but firms
40 per cent of less affected firms made such a response. appear to have been extremely reluctant to cut dividends

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or scrap outdated machinery.~9~ More interesting, ’dis- doned investments in plant and machinery (73 of these
posal of assets’ was widely adopted by firms who cited were firms who were ’extremely severely’ affected by the

problems arising from over-expansion through merger recession, and 134 were ’severely’ affected), while 259
and acquisition (see Table 2), and seems to reflect a abandoned or postponed investments in building, 285
specific response to a specific problem. By contrast, most postponed or abandoned investments in R&D or prod-
of the cost control measures were used in conjunction uct innovation or process innovation, 169 abandoned or
with each other. Finally, many firms regard the develop- postponed investments in training and 213 postponed
ment of overseas markets as important, despite the fact investments in marketing. In general, about three times as
that few regard foreign demand or high exchange rates as many firms postponed major investments as abandoned
a source of problems. As with corporate refocussing, this them, except for investments in plant and machinery
seems to be more of a general feature in management which were seven times as likely to be postponed as
attitudes than a response to the degree of severity of the abandoned. Needless to say, the vulnerability of firms to
recession.(&dquo;) the recession had a large effect on how they responded:
We also asked our firms, which of the following types 78 per cent of those who were ’extremely severely’ affec-
of organisational change they made: ’management meth- ted postponed or abandoned plant and equipment invest-
ods’, ’production processes’, ’labour organisation’ and ments (10 per cent brought them forward), while 31 per

’wage payment systems’, and whether these changes were cent of those who were ’moderately’ or not affected at all
induced by the recession. Although many of the firms in by the recession postponed or abandoned plant and
our sample made changes in their management methods equipment investments (19 per cent brought them
(418), few of these were induced by the recession (only forward).
116 were). Changes in labour organisation were also very Not all firms
postponed or abandoned their invest-
frequent (409) and were more likely to be made in res- plans, and, in particular, 86 respondents brought
ment
ponse to the recession (217). Changes in production forward investments in plant and machinery, 61 brought
processes were relatively infrequent (269) and largely forward investments in building and 135 brought for-
unrelated to the recession (only 58 were), as were changesward investments in marketing. Further, 159 firms in
in wage payment systems (95 out of 267 changes were total brought forward process innovations, and 189
induced by the recession). firms brought forward investments in straining. Rather
Although recessions do lead to some changes in the more interesting and surprising is the fact that 123 firms

way in which firms organise themselves, they may have a brought forward R&D investments and 217 brought
much bigger effect on the timing of major strategic invest-
forward product innovations (108 did both). There were
ment decisions. One expects to see firms acting more 185 (30 per cent of the sample) clear innovators (i.e. firms
cautiously, and perhaps, more short-sightedly in the face that brought forward either R&D or product innovation

of financial pressures and gloomy prognostications of without postponing the other), and 110 of these also
demand. Major capital expenditure is likely to be post- brought forward process innovations while 106 of them
poned, and more worrying, investments in R&D and brought forward training plans. These ’innovative firms’
innovative activity more generally may be scaled back or did not, in general, bring forward investments in plant
abandoned. However, recessions do not have the same and equipment, building or marketing, and only 20 of
effects on all firms, and it is important to identify those
them were ’extremely severely’ affected by the recession
firms and sectors (if any) which bring forward major (18 per cent). ’Innovators’ were neither noticeably larger
or smaller than the sample average, they were not more
strategic investments and try to transform their activities
rather than just cutting them back.l’l> Further, not all or less likely to be foreign-owned or to operate only a

investments are likely to be equally affected by recession-

single establishment, but they were more likely to be
manufacturing firms (especially in engineering). (14)
ary forces. Those that require a heavy injection of cash or
are most profitably exploited in booms are most likely to What is also interesting about the data displayed on
be postponed, while investments which have long-term Table 4 is that 29 per cent of responding firms made no
pay-offs or re-organise and redeploy existing assets are change at all to any of their investment plans. It is poss-
more likely to be brought forward in a recession. Invest- ible, of course, that these firms had no investment plans
ment in plant and equipment is an example of pro- cycli- to postpone, abandon or bring forward, but it may also
cal investment behaviour, while (as we have seen) be the case that plans are less easily (or frequently) post-
workplace reorganisation is more likely to be counter poned than actions taken to implement them. More gen-
cyclical. (12) erally, surveys like this often raise a worry that there is a
Table 4 displays the responses that we obtained on the difference between what firms say that they are doing and
timing of firms’ decisions. 291 firms postponed or aban- what they actually do. Thus, while 29 per cent of

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Table 4a. Investment decisions in the recessi

responding firms may have made no formal decision to tices. Of perhaps more comfort and more interest is the
abandon a particular plan, many of them may have effec- surprisingly large number of firms who have brought
tively done so. These two biases (if that is what they are) forward R~I~ investments, new product or process
work in the same direction; if plans are less frequently innovations and investments in training. These decisions
postponed than actions and if plans are more frequently do not seem to have been accompanied by an increase in
abandoned informally than formally, then the responses real investment in plant and machinery, but at least some
we have obtained may understate the response of firms to of these innovators are making complementary invest-
the recession.(151 ments in the development of human capital. Clearly, a
Those who think that recessions are a time of cleansing significant proportion of firms are doing more than just
in which firms bring forward major changes in their coping with the recession, and investments in technologi-
operations enabling them to emerge from the recession cal and human capital have been less severely affected by
’leaner and fitter’ can only draw limited comfort from the recession than have investments in physical capital.
these results. It is clear that there has been a major retar-
dation in the rate of investment in plant and equipment Conclusions
induced by the pressures of the recession (and a corre- Much of what we have uncovered in this survey corre-

sponding lack of scrapping of outdated machinery), and sponds to common popular perceptions of how the cur-
there has been a widespread disruption to normal meth- rent recession is affecting British industry. A very large
ods of labour force organisation. It may, of course, be proportion of our sample of responding firms feel that
that the investment decisions which have been postponed they have been ’extremely severely’ or ’severely’ affected
were of second order in importance, and that the disrup- by the recession, and many of them have embarked on
tion to shop floor organisation was necessary to clear extensive cost cutting operations. Many firms appear to
away restrictive and highly unproductive working prac- have made themselves more vulnerable than not to the

Table 4b. Investment decisions in the recession: all companies

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’~’able 4co Investment decisions in the recession: companies ’extremely severely’ affected by the recession

recession, mainly through over-expansion in the 1980s their operations. In particular, firms that are extremely
or because their organisational structures are too weak to hard hit by the recession seem to be much more likely to
enable them to respond quickly and effectively to adverse make major changes in their workforce organisation and
market conditions. A surprisingly high percentage of our operations than other firms, changes that may help to
respondents regard their problems as being largely a erode their human, technological and physical capital
failure of domestic demand, and relatively few seemed to stocks. In addition, these firms are very likely to have
feel that they had been affected by the worldwide abandoned or postponed investments in all forms of
recession or high exchange rates. Most of the restructur- capital, and it is hard to believe that the results of such
ing which has been induced by the recession has occurred actions will inevitably strengthen their long-run competi-
on the shop floor or, more generally, in workplace organ- tiveness. However, some firms-un®st of whom have not
isation, and these recession-induced responses have come been too severely affected by the recession-appear to
on top of a general trend toward corporate refocussing. have brought forward their innovative and training
Most surprising and most encouraging are signs that a activities, and they seem set to emerge from the recession
surprisingly large number of firms are accelerating their in a relatively strong competitive position. It is impossible
investments in R&D and new product or process to tell from our survey whether all of the many social and

innovation, and some of these firms also seem to be economic problems, directly or indirectly caused by the
in
investing training as well. recession, are a ’small price to pay’ for the encourage-
These responses suggest that there may be a pattern to ment and opportunities that adversity has given to these
the changes induced by recessions, a pattern in which innovators, and, indeed, to all those firms who have been
some firms (often the least hard hit) develop competitive able to cut fat without disturbing muscle. It is, however,
strengths which will provide a solid foundation for their hard to believe that there is not a more straightforward
post-recession operations while many others emerge way to encourage innovation or reduce inefficiency.
weakened, having had to cut ’too much muscle’ from

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NOTES

(1) For arguments suggesting that recessions are a time when firms make certain types of productivity-enhancing changes, see
Hall, 1991, Cabellero and Hammour, 1991, Cooper and Haltiwanger, 1993, Saint-Paul, 1993, and others. Grinyer, Mayes
and Mckiernan (1992) identify companies who achieve turnaround after periods of serious decline induced in part by
recession. Such firms have some degree of creative destruction within the firm. However, Oulton (1990) finds little evidence
for continuing positive effects from the 1980-1 recession.
(2) Of the 1506 non-responding firms, no response whatsoever was received from 1,115. 344 firms responded by declining our
offer to take part in the survey, and 47 gave partial answers.
(3) It should be noted however, that all employees are covered here irrespective of their location. Many larger companies have
employees based in other countries, and, as a consequence, the employment coverage ratios cited in the text may be a little
misleading.
(4) The word ’recession’ can mean many things to many people, and it is interesting to note that the recession was ’technically’
over at the time of the survey. This apparent gap between the perceptions of our responding firms and those of Treasury
economists may have arisen because our firms define recessions in terms of firm or market sales growth and not GNP
growth, or because our firms’ use of more subjective definition of recessions which focuses on expectations or confidence.
(5) The number of firms stating that a ’high exchange rate’ and the ’worldwide recession’ were very important factors in Table 2
is somewhat greater than the number saying that a ’decline in overseas sales’ seriously affected company performance in
Table 1. There may be a number of reasons for this, a slightly different question, more choice and so on, however, the general
picture of a much greater emphasis on domestic markets and policy remains the same across the two tables.
(6) It is worth recalling that large firms are heavily over-represented in our sample, and as a consequence, ’credit limits by banks’
and ’non or late payment by customers’ are likely to be somewhat less important for firms in our sample than for the full
population of UK firms.
(7) This is consistent with Penrose, 1959, who argued that there exist severe diseconomies of growth associated with the need to
provide new managers with firm-specific knowledge and skills, something that only existing managers can do. It is also
consistent with the evidence in Geroski and Machin, 1993, who find that high levels of corporate growth do not persist.
(8) Hasket and Martin, 1992, have argued that this shedding of overhead labour has made UK industry ’leaner and fitter’ than it
was in the 1970s, but no fitter than it was in the late-1960s.

(9) The unwillingness of firms to scrap outdated machinery is a little difficult to reconcile with arguments which suggest that
recessions induce a major upgrade in the vintage of a firm’s capital stock (e.g. see Cabellero and Hammour, 1991, Cooper
and Haltiwanger, 1993, and others). Our result may, however, reflect the cleansing effect of the 1980s recession; that is,
there may have been little room left for scrapping in 1990-3 given the extensive scrapping which is believed to have occurred
in the early-1980s. It may also be the case that plant closure is the predominant form of capital scrapping used by UK firms.
(10) These results are broadly consistent with a 1991 CBI Survey, which found that managers of UK firms were emphasising cost
reduction actions in response to the recession and avoiding radical restructuring (like rationalisation, acquisitions, and so
on).
(11) For some work on how different firms in the same industry (the US oil-well drilling business) change their strategies over the
cycle, see Mascarenhas and Aaker, 1989.
(12) See Saint-Paul, 1993, for a useful discussion of this point; Schleifer, 1986, discusses implementation cycles driven by demand
expectations.
(13) This is consistent with the arguments of Bean, 1990, and others that firms divert labour from goods producing activities
towards activities which expand and develop human capital in recessions when the opportunity cost of training is relatively
low.
(14) The behaviour of these ’innovative firms’ is not really consistent with Schumpeterian notions of recessions as a period of
intense innovative activity that unleashes a ’gale of creative destruction’ for two reasons. First, most of these firms did not
undertake the complementary investments in plant and equipment that are a integral feature of the Schumpeterian story.
Second, most of them see the recession as being nearly over and are, therefore, likely to be positioning themselves to
introduce new products and processes as the next boom unfolds. Geroski and Walters, 1993, provide evidence to suggest
that the introduction of major innovations and patenting activity has been pro-cyclical in the UK since the Second World
War.
(15) It is, of course, true that firms always postpone or abandon investment plans as market circumstances change, and it is
possible (but not very plausible) that a similar survey conducted in a boom might yield a similar rate of project postponement
or abandonment. At any rate, it is certainly the case that attributing all the changes recorded on Table 4 is liable to overstate
the effects of the recession.

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