Schumpeter (1939) claims that recessions are periods of “creative destruction”, oncentrating innovation that is useful for the long-term growth of the economy. However, previous research finds that standard measures of firms’ innovation, such as R&D expenditures or patenting, concentrate in booms. We argue that these standard measures do not capture shifts in firms’ innovative search strategies. We introduce a model of firms’ choice between exploration vs. exploitation over the business cycle and find evidence that firms shift towards exploration during contractions and exploitation during expansions. Results are stronger for firms in more cyclical industries and with weaker financial constraints.