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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 3: The financing and governance of new technologies

Colin Mayer


3. The financing and governance of new technologies Colin Mayer* 1. INTRODUCTION What are the financial sector preconditions for the successful development of a high-technology sector? The conventional answer is straightforward: an active venture capital industry combined with a liquid domestic stock market. The development of venture capital firms and stock markets is regarded as a priority for the growth of high-tech industries. Is this correct? How do high-tech firms finance themselves and what role do stock markets play in their development? There is accumulating evidence of a relationship between financial development and economic growth. Several studies report a relation between the size of financial systems at the start of a period and subsequent economic growth. Controlling for other considerations, financial development appears to contribute to growth. A range of measures of financial development are relevant – the volume of monetary assets, the size of banking systems and the size of stock markets. To the extent that it is possible to establish the channel by which financial development contributes to growth, it appears to be through the external financing of firms. Comparing the growth of different industries across countries or different companies suggests that there is an interrelationship between their growth rates, the extent to which they are dependent on external finance and the development of financial systems in which they are operating. In other words, financial development confers particular advantages on industries and companies that are especially dependent on external finance. These results are consistent with the view...

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