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Innovation Performance and Government Financing

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Abstract

External financing is important when inventors and small technology-based firms wish to commercialize their inventions. However, it is likely that problems related to adverse selection and moral hazard are present, and market failures occur, since inventors know more about the inventions than do potential external financiers. To overcome these problems, the Swedish Government has intervened in the market by offering loans with different terms to firms and inventors. Using a unique database on Swedish patents owned by individuals and small firms, this paper analyzes how different forms of external financing influence the outcome when patents are commercialized. The estimations show that projects with soft government financing in the R&D-phase have a significantly worse performance than projects without such financing, whereas projects with more market-oriented government loans perform as the average. Distinguishing between governmental financing alternatives with different terms makes it possible to draw the conclusion that government failure primarily depends on bad financing terms, rather than bad choices of projects. A policy implication is therefore that government institutions should make their loans more market-oriented already in the R&D-phase.

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  • Svensson, Roger, 2006. "Innovation Performance and Government Financing," Working Paper Series 664, Research Institute of Industrial Economics, revised 30 Sep 2006.
  • Handle: RePEc:hhs:iuiwop:0664
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    Cited by:

    1. Steven J. Davis & Magnus Henrekson, 2006. "Economic Performance and Work Activity in Sweden after the Crisis of the Early 1990s," NBER Working Papers 12768, National Bureau of Economic Research, Inc.
    2. Henrekson, Magnus & Stenkula, Mikael, 2009. "Entrepreneurship and Public Policy," Working Paper Series 804, Research Institute of Industrial Economics.
    3. Steven J. Davis & Magnus Henrekson, 2010. "Economic Performance and Market Work Activity in Sweden After the Crisis of the Early 1990s," NBER Chapters,in: Reforming the Welfare State: Recovery and Beyond in Sweden, pages 225-252 National Bureau of Economic Research, Inc.
    4. repec:spr:scient:v:75:y:2008:i:3:d:10.1007_s11192-007-1857-y is not listed on IDEAS

    More about this item

    Keywords

    Patents; Commercialization; Innovations; Outcome; External Financing; Government Intervention;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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