Capitalising on EU innovations – for the long-term

Risk capital investment and funding of innovative firms is vital to increasing EU-wide innovative capacity. However, a recent analysis by EU-funded researchers suggests that simply increasing the amount of money provided to these firms is not the best or only solution.

Climate Change and Environment

Many factors affect the relationship between risk capital financing, innovation, growth and hence increased EU competitiveness. The ‘Regional comparative advantage and knowledge based entrepreneurship’ (Ricafe2) project undertook an extensive analysis of these factors and provided recommendations for fostering the growth of European entrepreneurial companies and thus enhancing the EU position in the global marketplace. The researchers found that tax exemptions for financiers and, in particular, those that can fluctuate with time as do market conditions, provide incentives to support entrepreneurial projects. In addition, less procedural complexity combined with better legal enforcement of contracts and laws reduce the risk associated with financing. Furthermore, mandatory broad-sweeping patent litigation insurance can lead to excessive litigation or, conversely, insufficient protection of some firms, suggesting the need for efficient insurance contracts tailor-made to the individual needs of specific innovators. Ricafe2 also focused on the role of venture capital (VC) firms who provide initial funding to fledgling companies. These VC firms have been criticised for focusing on making the companies public (and hence making lots of money on stock sales) rather than on the long-term value of the businesses. In comparison with American counterparts, European VC firms are more deal-makers and less active monitors with limited ability to select venture projects that add real value to innovative firms. Thus, fostering the professionalism and transparency of EU VC firms may be much more fruitful in fostering innovation than simply increasing funding. Finally, with respect to the public sector, the researchers supported incentive-based performance-related management compensation, independence from political pressures and clear investment guidelines and policies to foster effective risk capital investment, innovation and growth. In summary, the Ricafe2 project carried out a comprehensive analysis of how the availability of risk capital as well as legal and public policies affect innovation and growth, providing important recommendations for enhancement of European innovative competitiveness.