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INNOVATION UK21 Innovation is difficult at the best of times and, as any business person knows, these are definitely not the best of times. The recent economic crisis has reshaped the business climate worldwide and placed new constraints on enterprises seeking to innovate. Research and related investments are an easy target in a downturn as the capital to finance them grows scarce. Faced by the credit restrictions biting in the financial sec-tor, enterprises may put off plans to develop and launch a new product or service. Falling demand can force com-panies to lay off personnel involved in R& D or product design, which are viewed as " non- essential" from a short-term " crisis response" perspective. Recruitment can be curtailed, especially for young science and technology graduates. Contract research budgets can be slashed and plans to commission outside research put on ice. Budgets related to protecting IP portfolios can also be cut back. To what extent is this actually happening? The answer is we don't know. The decisions of Europe's 30 million businesses - mainly SMEs - on such matters take time to feed through into the official statistics on which most innovation indicators are based. The much- respected European Innovation Scoreboard ( EIS), for instance, typically relies on data that is around 12- 18 months old. So it will be a little while before we know what the true picture is. Batoning down the hatches Surveys show that companies are certainly preparing for the worst. According to the 2009 Innobarometer study - a firm- level innovation survey that was undertaken across the EU - only one in eight ( 12%) of enterprises interviewed in early 2009 anticipated a boost in their innovation budgets this year. Furthermore, 28% of managers thought that their 2009 innovation budget would shrink, whereas only 9% had experienced cuts between 2006 and 2008 while one- third reported increased spending on innovation over this period. However, half of enterprises ( 51%) expected to maintain their current spending in 2009. A decrease in spending was viewed as most likely in the low- tech/ medium- low- tech manufacturing sector ( 14%), in the largest enterprise segment ( 13%), and in countries classified as " catching- up" ( 13%) according to the 2008 EIS classification. When asked about the direct effects of the current economic downturn, most enterprises did not report any particular change in innovation expenditure during the past six months ( 59%). However, of those who reported a change, roughly twice as many companies indicated that they had cut back on innovation- related spend-ing ( 22%) compared to those who had increased their budget ( 9%). Innovating in the economic crisis As the economic crisis continues to bite, what is the effect on the UK's European partners? Although capital- intensive research is one of the first casualties of a downturn, it is also an opportunity for firms and governments to re- examine innovation portfolios - and the innovation environment is likely to be changed fundamentally as a result. Mike Sharpe takes a look at the bigger picture Challenge- Led Innovation inovating in the downturn