Financial Systems, Corporate Investment in Innovation, and Venture Capital

Financial Systems, Corporate Investment in Innovation, and Venture Capital

Edited by Anthony Bartzokas and Sunil Mani

This book examines the role of venture capital institutions in financing technology-based ventures both in developed and developing countries. It also explores that part of venture capital activity which is hitherto vastly under-researched; namely the ability of venture capital institutions to render a whole host of value-added support functions. These include setting up management teams and designing strategic plans for fledgling enterprises. The latter issue is operationalized through a series of carefully chosen case studies.

Chapter 1: Introduction

Anthony Bartzokas and Sunil Mani

Subjects: economics and finance, economics of innovation, financial economics and regulation, innovation and technology, economics of innovation


Anthony Bartzokas and Sunil Mani The conditions for successful manufacturing have changed considerably in recent years. The allocation of industrial investment in plant, equipment and intangibles is changing markedly and new products and processes encompass a greater number of different technologies. These trends involve different investment needs. The main distinction is between ‘core technological investment’ (comprising the bulk of technological investment) and ‘complementary investment’ (which guarantees the efficiency of the ‘core investment’). Another dimension is the distinction between tangible and intangible investment, with the understanding that the latter comprises the bulk of technological investment. The decision to invest in new technologies is constrained by uncertainty and information costs. Uncertainty is particularly high when technologies are new and still changing rapidly and investments are considerable. Because liquidity risk is positively related to firm size and because barriers to credit increase the risk of doing business, entrepreneurs unable to insure themselves against large risks may prefer to remain small and to diversify their activities in whatever way they can. For instance they may start a new firm instead of expanding the one they currently operate. Barriers to credit also affect technology choices. If access to credit is partly determined by the collateral value of the investment, purchases of land, buildings and vehicles are facilitated while the building up of stocks, wage fund and credit to customers are not. This may result in the adoption by large firms of capital-intensive methods of production and in an emphasis on production...