1932

Abstract

We review the recent literature on the financing of innovation, inclusive of large companies and new start-ups. This research strand has been very active over the past five years, generating important new findings, questioning some long-held beliefs, and creating its own puzzles. Our review outlines the growing body of work that documents a role for debt financing related to innovation. We highlight the new literature on learning and experimentation across multistage innovation projects and how this impacts optimal financing design. We further highlight the strong interaction between financing choices for innovation and changing external conditions, especially reduced experimentation costs.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-111914-041825
2015-12-07
2024-07-21
Loading full text...

Full text loading...

/deliver/fulltext/financial/7/1/annurev-financial-111914-041825.html?itemId=/content/journals/10.1146/annurev-financial-111914-041825&mimeType=html&fmt=ahah

Literature Cited

  1. Acemoglu D, Linn J. 2004. Market size in innovation: theory and evidence from the pharmaceutical industry. Q. J. Econ. 3:1049–90 [Google Scholar]
  2. Acharya V, Baghai RP, Subramanian KV. 2014. Wrongful discharge laws and innovation. Rev. Financ. Stud. 27:301–46 [Google Scholar]
  3. Acharya V, Subramanian KV. 2009. Bankruptcy codes and innovation. Rev. Financ. Stud. 22:4949–88 [Google Scholar]
  4. Acharya V, Xu Z. 2013. Financial dependence and innovation: the case of public versus private firms Work. Pap. 19708, NBER [Google Scholar]
  5. Acs ZJ, Audretsch DB. 1987. An empirical examination of small firm growth. Econ. Lett. 25:363–66 [Google Scholar]
  6. Aghion P, Askenazy P, Berman N, Cette G, Eymard L. 2012. Credit constraints and the cyclicality of R&D investment: evidence from France. J. Eur. Econ. Assoc. 10:51001–24 [Google Scholar]
  7. Aghion P, Tirole J. 1994. The management of innovation. Q. J. Econ. 109:41185–209 [Google Scholar]
  8. Aghion P, Van Reenen J, Zingales L. 2013. Innovation and institutional ownership. Am. Econ. Rev. 103:277–304 [Google Scholar]
  9. Akcigit U, Kerr WR. 2012. Growth through heterogeneous innovations Work. Pap. 16443, NBER [Google Scholar]
  10. Anton JJ, Yao D. 1995. Start-ups, spin-offs, and internal projects. J. Law Econ. Organ. 11:2362–78 [Google Scholar]
  11. Atanassov J. 2013. Do hostile takeovers stifle innovation? Evidence from antitakeover legislation and corporate patenting. J. Financ. 68:31097–131 [Google Scholar]
  12. Beck T, Demirgüç-Kunt A, Laeven L, Levine R. 2008. Finance, firm size, and growth. J. Money Credit Bank. 40:1379–405 [Google Scholar]
  13. Bergemann D, Hege U. 1998. Venture capital financing, moral hazard and learning. J. Bank. Finance 22:6–8703–35 [Google Scholar]
  14. Bergemann D, Hege U. 2005. The financing of innovation: learning and stopping. RAND J. Econ. 36:4719–52 [Google Scholar]
  15. Berkowitz J, White M. 2004. Bankruptcy and small firms' access to credit. RAND J. Econ. 35:69–84 [Google Scholar]
  16. Bernstein S. 2015. Does going public affect innovation?. J. Financ. 70:41365–403 [Google Scholar]
  17. Bernstein S, Giroud X, Townsend R. 2014. The impact of venture capital monitoring: evidence from a natural experiment Work. Pap. 3007, Grad. Sch. Bus., Stanford Univ. [Google Scholar]
  18. Bertrand M, Schoar A, Thesmar D. 2007. Banking deregulation and industry structure: evidence from the 1985 French banking act. J. Financ. 62:2597–628 [Google Scholar]
  19. Black BS, Gilson RJ. 1998. Venture capital and the structure of capital markets: banks versus stock markets. J. Financ. Econ. 47:3243–77 [Google Scholar]
  20. Black S, Strahan P. 2002. Entrepreneurship and bank credit availability. J. Financ. 57:62807–33 [Google Scholar]
  21. Bloom N, Schankerman M, Van Reenen J. 2013. Identifying technology spillovers and product market rivalry. Econometrica 81:41347–93 [Google Scholar]
  22. Bozkaya A, Kerr W. 2014. Labor regulations and European venture capital. J. Econ. Manag. Strategy 23:4776–810 [Google Scholar]
  23. Brown JR, Fazzari SM, Petersen BC. 2009. Financing innovation and growth: cash flow, external equity, and the 1990s R&D boom. J. Financ. 64:151–85 [Google Scholar]
  24. Brown JR, Martinsson G, Petersen BC. 2012. Do financing constraints matter for R&D?. Eur. Econ. Rev. 56:81512–29 [Google Scholar]
  25. Brown JR, Martinsson G, Petersen BC. 2013. Law, stock markets, and innovation. J. Financ. 68:41517–49 [Google Scholar]
  26. Bushee BJ. 1998. The influence of institutional investors on myopic R&D investment behavior. Account. Rev. 73:3305–33 [Google Scholar]
  27. Cagetti M, De Nardi M. 2006. Entrepreneurship, frictions and wealth. J. Polit. Econ. 114:5835–70 [Google Scholar]
  28. Carlino G, Kerr WR. 2014. Agglomeration and innovation Work. Pap. 15-007, Bus. Sch., Harvard Univ. [Google Scholar]
  29. Cerqueiro G, Hegde D, Penas MF, Seamans R. 2014. Debtor rights, credit supply, and innovation Discuss. Pap. 2014-011, Tilburg Law Econ. Cent., Law Econ. Res. Pap. Ser., Tilburg [Google Scholar]
  30. Cetorelli N, Strahan PE. 2006. Finance as a barrier to entry: bank competition and industry structure in local U.S. markets. J. Financ. 61:437–61 [Google Scholar]
  31. Chava S, Chong X, Nanda V. 2012. Funding innovation: the role of lender expertise and control rights Work. Pap., Ga. Inst. Technol. [Google Scholar]
  32. Chava S, Oettl A, Subramanian A, Subramanian KV. 2013. Banking deregulation and innovation. J. Financ. Econ. 109:3759–74 [Google Scholar]
  33. Chemmanur T, Krishnan K, Nandy DK. 2011. How does venture capital financing improve efficiency in private firms? A look beneath the surface. Rev. Financ. Stud. 24:124037–90 [Google Scholar]
  34. Chemmanur T, Loutskina E, Tian X. 2014. Corporate venture capital, value creation, and innovation. Rev. Financ. Stud. 27:82434–73 [Google Scholar]
  35. Chemmanur T, Tian X. 2012. Do anti-takeover provisions spur corporate innovation? Presented at Am. Finance Assoc. Meet., Jan. 7, Chicago [Google Scholar]
  36. Cohen S, Hochberg Y. 2014. Accelerating startups: the seed accelerator phenomenon Work. Pap. doi:10.2139/ssrn.2418000 [Google Scholar]
  37. Comin D, Nanda R. 2014. Financial development and technology diffusion Work. Pap., Bus. Sch., Harvard Univ. [Google Scholar]
  38. Cornaggia J, Mao Y, Tian X, Wolfe B. 2013. Does banking competition affect innovation?. J. Financ. Econ. 115:189–209 [Google Scholar]
  39. Cumming D, Johan S. 2009. Venture Capital and Private Equity Contracting: An International Perspective Amsterdam: Elsevier Sci. Acad. [Google Scholar]
  40. Da Rin M, Hellmann T, Puri M. 2013. A survey of venture capital research. Handbook of the Economics of Finance 2A Corporate Finance GM Constantinides, M Harris, RM Stulz 537–638 Amsterdam: North Holland [Google Scholar]
  41. Ederer F, Manso G. 2011. Incentives for innovation: bankruptcy, corporate governance, and compensation systems. Handbook of Law, Innovation, and Growth RE Litan 90–111 Cheltenham, UK: Edward Elgar [Google Scholar]
  42. Edmans A. 2009. Blockholder trading, market efficiency, and managerial myopia. J. Financ. 64:62481–513 [Google Scholar]
  43. Ewens M, Fons-Rosen C. 2013. The consequences of entrepreneurial firm founding on innovation Work. Pap. doi:10.2139/ssrn.2291811 [Google Scholar]
  44. Ewens M, Nanda R, Rhodes-Kropf M. 2014. Entrepreneurship and the cost of experimentation Work. Pap., Bus. Sch., Harvard Univ. [Google Scholar]
  45. Fabrizio KR, Mowery DC. 2007. The federal role in financing major innovations: information technology during the postwar period. Financing Innovation in the United States, 1870 to the Present N Lamoreaux, KL Sokoloff 283–316 Cambridge, MA: MIT Press [Google Scholar]
  46. Fallick B, Fleischman CA, Rebitzer JB. 2006. Job-hopping in Silicon Valley: some evidence concerning the microfoundations of a high-technology cluster. Rev. Econ. Stat. 88:3472–81 [Google Scholar]
  47. Fang VW, Tian X, Tice S. 2013. Does stock liquidity enhance or impede firm innovation?. J. Financ. 69:52085–125 [Google Scholar]
  48. Ferreira D, Manso G, Silva AC. 2014. Incentives to innovate and the decision to go public or private. Rev. Financ. Stud. 27:256–300 [Google Scholar]
  49. Field A. 2003. The most technologically progressive decade of the twentieth century. Am. Econ. Rev. 93:41399–413 [Google Scholar]
  50. Francis J, Smith A. 1995. Agency costs and innovation: some empirical evidence. J. Account. Econ. 19:2383–409 [Google Scholar]
  51. Gans JS, Hsu DH, Stern S. 2002. When does start-up innovation spur the gale of creative destruction?. RAND J. Econ. 33:4571–86 [Google Scholar]
  52. Gompers PA. 1995. Optimal investment, monitoring, and the staging of venture capital. J. Financ. 50:51461–89 [Google Scholar]
  53. Gompers P, Lerner J, Scharfstein D. 2005. Entrepreneurial spawning: public corporations and the genesis of new ventures 1986 to 1999. J. Financ. 60:2577–614 [Google Scholar]
  54. González-Uribe J, Groen-Xu M. 2014. CEO contract horizon and innovation Work. Pap, Lond. School Econ. Polit. Sci., London [Google Scholar]
  55. Grossman SJ, Hart OD. 1986. The costs and benefits of ownership: a theory of vertical and lateral integration. J. Pol. Econ. 94:691–719 [Google Scholar]
  56. Guedj I, Scharfstein D. 2004. Organizational scope and investment: evidence from the drug development strategies and performance of biopharmaceutical firms Work. Pap. 10933, NBER [Google Scholar]
  57. Hall B, Lerner J. 2010. The financing of R&D and innovation. Handbook of the Economics of Innovation B Hall, N Rosenberg 609–39 Amsterdam: Elsevier [Google Scholar]
  58. Hall BH, Griliches Z, Hausman JA. 1986. Patents and R&D: Is there a lag?. Int. Econ. Rev. 27:2265–83 [Google Scholar]
  59. Hart O, Moore J. 1990. Property rights and the nature of the firm. J. Polit. Econ. 98:1119–58 [Google Scholar]
  60. He JJ, Tian X. 2013. The dark side of analyst coverage: the case of innovation. J. Financ. Econ. 109:3856–78 [Google Scholar]
  61. Hellmann T. 2007. When do employees become entrepreneurs?. Manag. Sci. 53:6919–33 [Google Scholar]
  62. Hellmann T, Puri M. 2000. The interaction between product market and financing strategy: the role of venture capital. Rev. Financ. Stud. 13:4959–84 [Google Scholar]
  63. Hellmann T, Puri M. 2002. Venture capital and the professionalization of start-up firms: empirical evidence. J. Financ. 57:169–97 [Google Scholar]
  64. Hochberg Y, Serrano C, Ziedonis R. 2014. Patent collateral, investor commitment, and the market for venture lending Work. Pap. 20587, NBER [Google Scholar]
  65. Holmstrom B. 1982. Managerial incentive problems: a dynamic perspective. Essays in Economics and Management in Honor of Lars Wahlbeck Helsinki: Swed. Sch. Econ. Press [Google Scholar]
  66. Holmstrom B. 1989. Agency costs and innovation. J. Econ. Behav. Organ. 12:3305–27 [Google Scholar]
  67. Howell S. 2014. Financing constraints as barriers to innovation: evidence from R&D grants to energy startups Work. Pap., Bus. Sch., Harvard Univ. [Google Scholar]
  68. Hsu PH, Tian X, Xu Y. 2014. Financial development and innovation: cross-country evidence. J. Financ. Econ. 112:116–35 [Google Scholar]
  69. Jayaratne J, Strahan PE. 1996. The finance-growth nexus: evidence from bank branch deregulation. Q. J. Econ. 111:3639–70 [Google Scholar]
  70. Kerr WR, Lerner J, Schoar A. 2014. The consequences of entrepreneurial finance: evidence from angel financings. Rev. Financ. Stud. 27:20–55 [Google Scholar]
  71. Kerr WR, Lincoln WF. 2010. The supply side of innovation: H-1B visa reforms and US ethnic invention. J. Labor Econ. 28:3473–508 [Google Scholar]
  72. Kerr WR, Nanda R. 2009. Democratizing entry: banking deregulations, financing constraints, and entrepreneurship. J. Financ. Econ. 94:124–49 [Google Scholar]
  73. Kerr WR, Nanda R, Rhodes-Kropf M. 2014. Entrepreneurship as experimentation. J. Econ. Perspect. 28:325–48 [Google Scholar]
  74. King RG, Levine R. 1993a. Finance and growth: Schumpeter might be right. Q. J. Econ. 108:717–37 [Google Scholar]
  75. King RG, Levine R. 1993b. Finance, entrepreneurship and growth: theory and evidence. J. Monet. Econ. 32:513–42 [Google Scholar]
  76. Knight FH. 1921. Risk, Uncertainty, and Profit Boston, MA: Houghton Mifflin [Google Scholar]
  77. Kogan L, Papanikolaou D, Seru A, Stoffman N. 2012. Technological innovation, resource allocation, and growth Work. Pap. 17769, NBER [Google Scholar]
  78. Kortum S, Lerner J. 2000. Assessing the contribution of venture capital to innovation. RAND J. Econ. 31:4674–92 [Google Scholar]
  79. Lerner J. 1995. Venture capitalists and the oversight of private firms. J. Financ. 50:301–18 [Google Scholar]
  80. Lerner J. 1999. The government as venture capitalist: the long-run impact of the SBIR program. J. Bus. 72:3285–318 [Google Scholar]
  81. Lerner J. 2012. The Architecture of Innovation: The Economics of Creative Organizations Boston, MA: Harvard Bus. Sch. Press [Google Scholar]
  82. Lerner J, Seru A. 2014. The use and abuse of patent data Work. Pap., Bus. Sch., Harvard Univ. [Google Scholar]
  83. Lerner J, Sorensen M, Strömberg P. 2011. Private equity and long-run investment: the case of innovation. J. Financ. 66:2445–77 [Google Scholar]
  84. Lerner J, Wulf J. 2007. Innovation and incentives: evidence from corporate R&D. Rev. Econ. Stat. 89:4634–44 [Google Scholar]
  85. Levine R. 1997. Financial development and economic growth: views and agenda. J. Econ. Lit. 35:688–726 [Google Scholar]
  86. Mann W. 2014. Creditor rights and innovation: evidence from patent collateral Work. Pap., Anderson Sch., Univ. Calif. Los Angeles [Google Scholar]
  87. Manso G. 2011. Motivating innovation. J. Financ. 66:51823–60 [Google Scholar]
  88. Nanda R, Nicholas T. 2014. Did bank distress stifle innovation during the Great Depression?. J. Financ. Econ. 114:2273–92 [Google Scholar]
  89. Nanda R, Rhodes-Kropf M. 2010. Financing risk and innovation Work. Pap. 11-013, Bus. Sch., Harvard Univ. [Google Scholar]
  90. Nanda R, Rhodes-Kropf M. 2012. Innovation and the financial guillotine. Work. Pap. 13-038, Bus. Sch., Harvard Univ.
  91. Nanda R, Rhodes-Kropf M. 2013. Investment cycles and startup innovation. J. Financ. Econ. 110:2403–18 [Google Scholar]
  92. Nanda R, Younge K, Fleming L. 2015. Innovation and entrepreneurship in renewable energy. The Changing Frontier: Rethinking Science and Innovation Policy A Jaffe, B Jones 199–232 Chicago, IL: Univ. Chic. Press [Google Scholar]
  93. Nicholas T. 2011. What drives innovation?. Antitrust Law J. 77:3787–809 [Google Scholar]
  94. NSF (Natl. Sci. Found.) 2014. Science and Engineering Indicators 2014 Arlington, VA: NSF [Google Scholar]
  95. Pástor L', Veronesi P. 2009. Technological revolutions and stock prices. Am. Econ. Rev. 99:41451–83 [Google Scholar]
  96. Raff DM, Trajtenberg M. 1996. Quality-adjusted prices for the American automobile industry: 1906–1940. The Economics of New Goods TF Bresnahan, RJ Gordon 71–108 Chicago, IL: Univ. Chic. Press [Google Scholar]
  97. Rajan RG, Zingales L. 1998. Financial dependence and growth. Am. Econ. Rev. 88:3559–86 [Google Scholar]
  98. Robb AM, Robinson DT. 2012. The capital structure decisions of new firms. Rev. Financ. Stud. 27:153–79 [Google Scholar]
  99. Saint-Paul G. 1997. Is labour rigidity harming Europe's competitiveness? The effect of job protection on the pattern of trade and welfare. Eur. Econ. Rev. 41:3499–506 [Google Scholar]
  100. Saint-Paul G. 2002. Employment protection, international specialization, and innovation. Eur. Econ. Rev. 46:2375–95 [Google Scholar]
  101. Samaniego RM. 2006. Employment protection and high-tech aversion. Rev. Econ. Dyn. 9:2224–41 [Google Scholar]
  102. Samila S, Sorenson O. 2011. Venture capital, entrepreneurship, and economic growth. Rev. Econ. Stat. 93:338–49 [Google Scholar]
  103. Scherer FM. 1984. Innovation and Growth: Schumpeterian Perspectives Cambridge, MA: MIT Press [Google Scholar]
  104. Scherer FM, Harhoff D. 2000. Technology policy for a world of skew-distributed outcomes. Res. Policy 29:4–5559–66 [Google Scholar]
  105. Schumpeter J. 1934. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle Cambridge, MA: Harvard Univ. Press [Google Scholar]
  106. Seru A. 2014. Firm boundaries matter: evidence from conglomerates and R&D activity. J. Financ. Econ. 111:381–405 [Google Scholar]
  107. Stein J. 1988. Takeover threats and managerial myopia. J. Polit. Econ. 96:61–80 [Google Scholar]
  108. Trajtenberg M. 1990. A penny for your quotes: patent citations and the value of innovations. RAND J. Econ. 1:172–87 [Google Scholar]
  109. Wasserman N. 2003. Founder-CEO succession and the paradox of entrepreneurial success. Organ. Sci. 14:2149–72 [Google Scholar]
  110. Williams H. 2013. Intellectual property rights and innovation: evidence from the human genome. J. Polit. Econ. 121:1–27 [Google Scholar]
  111. Yu S. 2014. The impact of accelerators on high-technology ventures Work. Pap., Stern Sch. Bus., N.Y. Univ. [Google Scholar]
/content/journals/10.1146/annurev-financial-111914-041825
Loading
  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error