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Adverse selection and financing of innovation: is there a need for R&D subsidies?

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  • Takalo, Tuomas

    ()
    (Bank of Finland Research)

  • Tanayama, Tanja

    ()
    (Helsinki Center of Economic Research (HECER))

Abstract

We study the interaction between private and public funding of innovative projects in the presence of adverse-selection based financing constraints. Government programmes allocating direct subsidies are based on ex-ante screening of the subsidy applications. This selection scheme may yield valuable information to market-based financiers. We find that under certain conditions, public R&D subsidies can reduce the financing constraints of technology-based entrepreneurial firms. Firstly, the subsidy itself reduces the capital costs related to innovation projects by reducing the amount of market-based capital required. Secondly, the observation that an entrepreneur has received a subsidy for an innovation project provides an informative signal to market-based financiers. We also find that public screening works more efficiently if it is accompanied by subsidy allocation.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 19/2008.

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Length: 41 pages
Date of creation: 09 Sep 2008
Date of revision:
Publication status: Published as Takalo, Tuomas and Tanja Tanayama, 'Adverse selection and financing of innovation: is there a need for R&D subsidies?' in Journal of Technology Transfer , 2010, pages 16-41.
Handle: RePEc:hhs:bofrdp:2008_019

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: adverse selection; innovation finance; financial constraints; R&D subsidies; certification;

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Citations

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Cited by:
  1. Bertoni, Fabio & Tykvová, Tereza, 2012. "Which form of venture capital is most supportive of innovation?," ZEW Discussion Papers 12-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Toivanen, Otto, 2009. "Innovation Policy, Entrepreneurship, and Development: A Finnish View," MERIT Working Papers 050, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  3. Uwe Cantner & Sarah Kösters, 2012. "Picking the winner? Empirical evidence on the targeting of R&D subsidies to start-ups," Small Business Economics, Springer, vol. 39(4), pages 921-936, November.
  4. Bernd Ebersberger, 2011. "Public funding for innovation and the exit of firms," Journal of Evolutionary Economics, Springer, vol. 21(3), pages 519-543, August.
  5. Takalo , Tuomas, 2013. "Rationales and instruments for public innovation policies," Research Discussion Papers 1/2013, Bank of Finland.
  6. Ensthaler, Ludwig & Giebe, Thomas, 2010. "A dynamic auction for multi-object procurement under a hard budget constraint," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 310, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  7. Isabel Busom & Beatriz Corchuelo & Ester Martinez Ros, 2012. "Tax incentives and direct support for R&D: What do firms use and why?," Working Papers wpdea1212, Department of Applied Economics at Universitat Autonoma of Barcelona.
  8. Massimo Colombo & Philippe Mustar & Mike Wright, 2010. "Dynamics of Science-based entrepreneurship," The Journal of Technology Transfer, Springer, vol. 35(1), pages 1-15, February.
  9. Licht, Georg & Pfirrmann, Oliver & Strohmeyer, Robert & Heinrich, Stephan & Tonoyan, Vartuhi & Eckert, Thomas & Woywode, Michael & Crass, Dirk & Sellenthin, Mark O., 2012. "Ex-post-Evaluierung der Fördermaßnahmen BioChance und BioChancePlus im Rahmen der Systemevaluierung "KMU-innovativ": Begleit- und Wirkungsforschung zur Hightech-Strategie," ZEW Dokumentationen 12-05, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  10. Meuleman, Miguel & De Maeseneire, Wouter, 2012. "Do R&D subsidies affect SMEs’ access to external financing?," Research Policy, Elsevier, vol. 41(3), pages 580-591.
  11. Busom, Isabel & Corchuelo, Beatriz & Martinez Ros, Ester, 2012. "Tax incentives or subsidies for R&D?," MERIT Working Papers 056, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  12. Richard Gretz & Jannett Highfill & Robert Scott, 2012. "R&D subsidy games: a cost sharing approach vs. reward for performance," The Journal of Technology Transfer, Springer, vol. 37(4), pages 385-403, August.
  13. José Ángel Zúñiga-Vicente & César Alonso-Borrego & Francisco J. Forcadell & José I. Galán, 2014. "Assessing The Effect Of Public Subsidies On Firm R&D Investment: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 28(1), pages 36-67, 02.

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