Working Paper Series
Innovation Performance and Government Financing
Abstract: External financing is important when inventors and small
technology-based firms wish to commercialize their inventions. However, it
is likely that problems related to adverse selection and moral hazard are
present, and market failures occur, since inventors know more about the
inventions than do potential external financiers. To overcome these
problems, the Swedish Government has intervened in the market by offering
loans with different terms to firms and inventors. Using a unique database
on Swedish patents owned by individuals and small firms, this paper
analyzes how different forms of external financing influence the outcome
when patents are commercialized. The estimations show that projects with
soft government financing in the R&D-phase have a significantly worse
performance than projects without such financing, whereas projects with
more market-oriented government loans perform as the average.
Distinguishing between governmental financing alternatives with different
terms makes it possible to draw the conclusion that government failure
primarily depends on bad financing terms, rather than bad choices of
projects. A policy implication is therefore that government institutions
should make their loans more market-oriented already in the R&D-phase.
Keywords: Patents; Commercialization; Innovations; Outcome; External Financing; Government Intervention; (follow links to similar papers)
JEL-Codes: G30; O31; O38; (follow links to similar papers)
31 pages, February 28, 2006, Revised September 30, 2006
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