The COVID-19 pandemic has adversely impacted firms in all economies worldwide. Their innovative behavior in the initial- and subsequent years is crucial to economic recovery. We investigate its impact on firms’ innovation activities by analyzing adversely affected firms’ innovation responses. In our analysis, we focus on a sample of German firms drawn from a representative survey. We show that firms substantially reduce R&D and innovation expenditure in the first and the following two years. Moreover, firms’ pre-pandemic digital capabilities are able to reduce this negative response significantly.