Public sector research - shaping factors - financial markets



What do financial markets refer to in the context of innovation?

Innovation activities often involve considerable uncertainties and risks. At the same time, sizeable sunk costs have to be incurred by firms who want to carry out such activities. Financing these costs relies on internal sources of funds in many cases, but where these are inadequate, as in many start-up firms or where large new product platforms are being developed by large firms, firms must turn to external financial markets. Broadly speaking, there are two types of financing available: debt financing, provided chiefly by banks; and equity financing, provided by stock markets, venture capitalists, angel investors, etc. Information asymmetries between financing organisations and innovative firms, particularly start-ups, partly explain the often considerable difficulties the latter face in securing financing for their innovation activities.




How are financial markets relevant to the contributions of public sector research activities to innovation performance?

Financial markets are directly relevant to public sector research to the extent that they enable or constrain the creation of spin-off firms. But they also have an indirect influence. For instance, where financial markets are weakly developed or risk-averse vis-à-vis technological innovation, then business demand for the products and services of public sector research is likely to be limited. This will reduce the opportunities for public sector research to contribute to innovation performance.


How do financial markets shape the interests, activities and resources of the relevant actors?

Well-functioning financial markets that are open to investment in high-risk and potentially high-returns innovation projects offer opportunities to researchers to create spin-off firms. For research universities and public research institutes, financial markets that are favourable to innovative firms will create greater opportunity for collaboration with business. This will have an effect on the portfolio of research undertaken by public sector research, better linking it to innovation agendas. Where a country’s industrial ecology is dominated by large firms, particularly foreign firms, domestic financial markets may be less important in influencing firms’ innovative behaviours as they are able to rely more readily on internal funds for innovative projects.


Which policies are relevant to financial markets and their shaping of the contributions of public sector research to innovation performance?

The most pertinent policies are those that try to address market failures in financial markets. In the context of public sector research, these are risk capital measures in support of spin-offs.



Hall, B. and H. Lerner (2010), “The Financing of R&D and Innovation”, in Hall, B. and N. Rosenberg (eds.), Handbook of the Economics of Innovation, Elsevier-North Holland.

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