Public Policy and the Efficiency of Capital Markets
New Horizons in Intellectual Property series
Chapter 1: Introduction
In developed economies, technological innovation is a primary driver of economic growth (see, for example, Romer, 2003; Solow, 1956). Intensified competition stemming from the deregulation and globalisation of markets has made tangible and financial assets more commodity-like. Simultaneously, growing investment in research and development (R & D) has led to an ever increasing pace of technological change in the sense postulated by Schumpeter (1962), when describing the creative destruction of technologies and markets (see, for example, Christensen, 1997). This trend has put pressure on firms to reinvent their business models (see, for example, Hamel, 2002). However, although both managers and investors increasingly perceive the importance of intangible assets – such as technological innovations – to the commercial success of companies, they often lack knowledge of their economic characteristics and do not have instruments for their measurement and valuation (see, for example, Hand and Lev, 2003). For example, intangible assets are rarely reflected in official measures of economic performance, and most are not accounted for as investments in financial statements (see, for example, OECD, 2008). As a result, financial statements have lost explanatory relevance in relation to the market value of firms (see, for example, Ballow et al., 2004). This has severe implications for the functioning of capital markets.