The impact of open innovation on firms’ performance in bad times: evidence from COVID-19 pandemic

Open innovation, characterized by the collaborative sharing and management of knowledge and technologies, is posited to be a strategic tool for corporate resilience during crises. To empirically assess the validity of this proposition, this paper employs a text analysis technique to construct the open innovation variable and analyzes its impact on the performance of publicly listed Chinese firms during the COVID-19 pandemic. In the event study, we find that firms actively engaging in open innovation before the pandemic experienced fewer losses in the stock market when the pandemic broke out. Utilizing a difference-in-differences framework, we provide evidence that the positive impact of open innovation on firm performance is more pronounced during the pandemic compared to normal periods. We also suggest that firms with higher absorptive capacity and those practicing moderate levels of open innovation can benefit more from open innovation during the pandemic. The results of our study underscore the strategic importance of open innovation, particularly during bad times, and contribute to the broader understanding of innovation management under adverse conditions.