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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.
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Chapter 2: The financing of research and development

Bronwyn Hall


2. The financing of research and development Bronwyn Hall1 INTRODUCTION It is a widely held view that research and development (R&D) activities are difficult to finance in a freely competitive market place. Support for this view in the form of economic–theoretic modeling is not difficult to find and probably begins with the classic articles of Nelson (1959) and Arrow (1962), although the idea itself was alluded to by Schumpeter.2 The argument goes as follows: the primary output of R&D investment is the knowledge of how to make new goods and services, and this knowledge is non-rival – use by one firm does not preclude its use by another. To the extent that knowledge cannot be kept secret, the returns to the investment in it cannot be appropriated by the firm undertaking the investment, and therefore such firms will be reluctant to invest, leading to the under provision of R&D investment in the economy. Since the time when this argument was fully articulated by Arrow, it has of course been developed, tested, modified and extended in many ways. For example, Levin et al. (1987) and Mansfield et al. (1981) found, using survey evidence, that imitating a new invention was not costless, but could cost as much as 50–75 per cent of the cost of the original invention. This fact will mitigate but not eliminate the underinvestment problem. Empirical support for the basic point concerning the positive externalities created by research that was made...

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