Innovation under Fiscal Constraints: Evidence from Public Sector in Europe

The Great Recession of 2008 put public sector in Europe under considerable strain. Countries across the continent slashed their public administration budgets to manage their expenditure. Austerity measures also included spending cuts in other important areas like social protection. Under such circumstances, public organizations were under considerable financial and political pressure to find novel and innovative solutions to their increasingly complex social problems. However, evidence shows that financial resources are crucial for organizations to innovate. In this study, we examine the innovation outcomes of public organizations under conditions of budget constraints. Using data from the Coordinating for Cohesion in the Public Sector of the Future (COCOPs) project, we show that fiscal constraints were associated with significant negative innovation outcomes in European public sector. We also use Merton’s strain theory to design a framework for innovation under fiscal constraints. The results support the framework and show that under conditions of strong civic norms, public organizations are forced to innovate when faced with financial strain.