Extended abstract Science-based technology development is increasingly common. Innovations drawing upon scientific knowledge are more valuable. This paper examines how macroeconomic dynamics, specifically the business cycle, impact firms' engagement in science-based R&D. Following the Schumpeterian intuitions, scholars have long studied the effects of the business cycle on innovation. Firm innovation in terms of both R&D investments and outputs is procyclical due to the higher cost of capital and lower appropriability of rents during recessions. However, firms engage gradually in distant search processes during recessions to restore their declining performance. Hence, technological exploration, i.e., innovation beyond an industry's or region's pre-existing knowledge base, is counter-cyclical. Do firms also increase science-based R&D during recessions? It is a theoretically important question as science-based technology development also constitutes a distant search, in which firms' inventors ask different sets of questions and draw upon the knowledge developed largely by an epistemically distinct community. Hence, we hypothesize that science-based R&D is counter-cyclical. However, science-based innovations also have lower transfer costs and are more prone to spillovers. Hence, a firm should emphasize science-based R&D only when demand is robust, and the cost of capital is low. Accordingly, we formulate a competing hypothesis that science-based R&D is procyclical. We tested our hypotheses in two studies (1995-2022). In the first study, we used Business Enterprise Research and Development (BERD) innovation surveys, published by the Office of National Statistics (ONS). These provide data about the UK-based firms' investments in basic research vis-à-vis development. These survey samples represent all firms in the UK and reflect firms' R&D investment behavior at the population level. We found that firms' investments in basic (scientific) research are procyclical. In the second study, we used the data on firms' patents granted by the USPTO (PatentsView). In this study, we selected firms that are the largest US-based patent assignees in the USPTO, assuming that these firms would have high absorptive capacity and would pioneer and shape several technology areas. Thus, they had the ability and strategic incentives to engage in science. This study also showed that firms' engagement in science-based technology development is procyclical. Our study contributes to the research streams on science-based R&D and the effect of the business cycle on technology search and firms' innovation.
