Forschungs- & Entwicklungsinformationsdienst der Gemeinschaft - CORDIS

Financing of innovation: Policy implications

- Development of Skills in Assessment of Intangible Investments Should be encouraged:
In The Green Paper on Innovation of The Commission (Dec. 1995), actions to promote innovation financing were proposed at both a national and a Community level. For example, it was suggested that the banks should establish partnerships with expert bodies in appraising innovation projects, i.e. expanding the banks' competence in relation to innovation financing. Related to this, the OECD (Gonenc, 1996, p.4) points to a dual development between an increase in technological, operational, and marketing uncertainties in innovation projects on the one hand, and increased requirements for sophisticated skills and techniques in screening, selection and management of R&D and innovation projects on the other hand. This issue will be even more important in the future because the importance of intangible assets in production over the past few years has increased and should be expected to do so in the future. Current experiments to include knowledge assets in established accounting procedures should therefore be encouraged.

- Radical Changes are Necessary to Change the Existing Venture Capital Market:
In Europe today, almost all countries try to boost their venture capital markets, recognising that a lack of equity for innovation is a major constraint to innovation in small- and medium-sized firms. This study indicates, however, that existing venture funds are unlikely to shift to financing small, technology based firms. Too high fixed costs; lock-in with respect to competencies etc. are some of the reasons. In itself this leads to the policy conclusion that the intention to boost the venture capital industry must either involve institutional reform-new funds-or involve very strong incentives/measures to redirect existing venture funds towards new, technology-based, small firms. In our view, it could, however, be seen in connection with a second suggestion which has to do with informal venture capital.

- In Europe informal venture capital should be put on the agenda as a major policy issue for promoting financing of innovation:

There are several arguments for this suggestion. As far as the empirical evidence goes, informal venture capital is more directed towards small, early stage investments. Informal venture capital also tends to be geographically widespread whereas formal venture funds are concentrated in certain geographical areas. Further, formal venture capital has to a large extent shifted its focus from early-stage, high-tech (and high-risk) investments; this type of financing is often a gateway to other types of financing-bank financing, government support programmes, and other equity investments. The hands-on character of the investment often provides the firm with an upgrading of competencies, especially with respect to management skills. Initiatives supporting the functioning of the informal venture capital market are unlikely to suffer from dead-weight effects. The cost per job created easily compares with that of other initiatives. Displacement effects, the redirection of activity from equivalent or otherwise economically beneficial activities, is likely to be low (there are, of course, also drawbacks).

It was pointed out that, at least in the U.S, there may be complementarity between informal investors and formal venture capital firms. Whether such complementary relationships exist elsewhere than in the United States is, however, uncertain. But if they do, the policy implications are immense. The most obvious implication is that current attempts to boost formal venture capital markets in Europe-now seen in many countries-may seem successful in the short run. But long-term efficiency is accomplished only if dual initiatives are taken to promote both the informal and the formal venture capital industry and in particular the interplay between informal and formal investments. In fact, coupling formal venture funds with informal investors could be a method to redirect some of the formal venture funds towards "classic" venture investments. The advantage would be that private investors may contribute substantially to management expertise and partly to monitoring, thus reducing fixed costs for the formal venture capital firm.

Policy formulation and research should go hand in hand on this issue. One of the things to explore is the specific way informal venture capital markets could be developed in accordance with the specific national or regional context. Business angel networks and other policy options are sensitive to such national and regional contexts.

- Financial Organisations Should Be Involved in Network Policies:
A number of policies throughout Europe have focused upon initiatives to establish or enhance networking between private firms and organisations specialised as consultants on technological development and diffusion. Also, at the EU level these policies have attained interest. It has generally not been the case, however, that financial organisations have had a formal role in these networking policies. It should be considered if and in what way financial organisations - including EU funding sources like the European Investment Fund-could contribute. Obvious benefits are improved knowledge of the markets and possible synergies with other firms and financial organisations (one financial organisation may be the gateway to other financial organisations or markets). Involvement of financial organisations in different types of network policies may thus alleviate some of the problems of assessing and trusting not only the technology in question, but also especially the persons and firms involved.


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Evaluation - Policies
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