Innovation And Finance: The Theoretical Links
The economic literature shows that the relationship between innovation and finance has a bilateral nature. From one standpoint, financial systems influence innovative activity by exerting their functions through the different components of their structure. From another standpoint, technological innovation impacts on financial systems’ performances and requires the emergence of specific funding solutions. This paper investigates analytically these connections. The results indicate that efficient financial systems can promote innovation by selecting the most valid entrepreneurial initiatives, evaluating their potential earnings and allowing agents to diversify the associated risks. At the same time, different financial structures can determine divergences across countries with respect to their innovative achievements at the sectoral level. It is also found that the resource allocation problem for technological innovation can be mitigated by both the evolution of I.C.T., which decreases information and transaction costs, and the use of venture capital contracts, which reduces asymmetric information and moral hazard problems.
Volume (Year): XVIII (2006)
Issue (Month): 1 ()
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