Competition in capital markets and its contribution to growth and innovation

Financing conditions influence whether innovative firms can enter, expand and constrain established suppliers. Competition in capital markets can therefore affect innovation and productivity across the economy, as well as conditions in financial markets. This paper examines competition in equity investment in unlisted innovative firms, focussing on independent venture capital, corporate venture capital, private equity and equity crowdfunding. Bank finance, public equity markets, market infrastructure and intermediary services are covered where they offer workable alternatives or affect private financing or exit options. The paper assesses whether firms have credible alternatives that constrain capital providers on financial, governance and strategic terms, and how choice changes over the financing lifecycle. It distinguishes financing constraints arising from the risks of innovation from restrictions on competition among providers and intermediaries. It examines how later stage finance and exit conditions affect bargaining, investment incentives and the merger counterfactual. It considers how barriers to entry and expansion, anticompetitive conduct and mergers may restrict firms’ financing or exit options, including through investors’ ownership and contractual rights. Finally, it discusses how competition enforcement and advocacy, pro-competitive financial regulation, and co-operation between competition and financial authorities can address these risks while preserving investor protection and financial stability.