Financing Innovation in Europe

Project Start: 11/2017
Status: Completed
Researchers: David Heller, Jan Krzyzanowski, Uwe Walz
Category: Corporate Finance
Funded by: European Patent Office (EPO)

Topics and Objectives

The project examined the relation between firm financing conditions and invention activities. The project output contains a Policy Paper, a Data Report, and two Working Papers.

The Policy Paper “Financial Integration, Financing Constraints, and Innovation in Europe: Is more better?” analyzes how innovations are financed and how changes in the availability of funding affect the type and amount of inventions firms introduce to the market. The paper should identify whether there is a causal link to the availability of more financial resources and inventive outcomes. Further, we tried to shed light on the potentially different effects of more financial resources on the quantity as well as the quality of inventions.

We examined the effects of financial integration and the loosened financial constraints in the European Union (EU) on firm inventive activities using recent literature and the European patent office (EPO) data. We looked into the effects of the strengthening of Pan-European financial constraints in the course of an exercise of the European Banking Authority (EBA) and its consequences for several dimensions of firms’ patenting activities.

Further, the project includes the Data Report “Patent Measures from the Patstat Database – Descriptive Data Analysis and Code Report”. We did a detailed time series analysis on patent measures derived from the Patstat database from multiple perspectives, including evolvements over different technological sectors, firm sizes, and countries.

In the Working Paper “Patented Inventions in Europe – The Impact of Financial Resources on Firms’ Patented Inventions” we analyzed the impact of decreases in available financial resources on various dimensions of patented firm-level inventions. We used the European Capital exercise by the European Banking Authority (EBA) as a quasi-experimental setup as it required a subset of European banks to increase their capital ratios and thereby reduced the availability of their financial resources to the financing needs of firms.

In the paper “The Impact of Financial Resources on Corporate Inventions: Quasi-Natural Experimental Evidence from Financial Market Integration” we analyzed the impact of financial resources on firm-level patenting. The study used the European Commission’s effort to harmonize financial markets, the so-called Financial Service Action Plan (FSAP), as an exogenous shift improving firms’ access to funding. We analyzed whether and how affected firms adjust their patenting activities in terms of several value-relevant characteristics.

Key Findings

  • More finance does not enhance innovative activity per se and less finance is not harmful to firms’ outcomes of their innovative activities by itself.
  • Marginal effects on financial obstacles may even be positive, regarding qualitative dimensions of firms’ patenting activities; additional funding may induce firms to also file patents of relatively lower quality and value.
  • Less finance leads to less innovative activities in terms of budgetary dimensions patented inventions.
  • Less finance has a positive impact on qualitative dimensions.
  • Increased funding is associated with more patents in quantitative terms but of lower average technological quality and value.
  • Firms affected by financial constraints, alternate towards filing fewer explorative (i.e. impactful and generally applicable) but rather incremental patents.
  • Finance as a key input factor for firms’ inventive activities has multi-layered implications for their inventing activities, respectively the associated outcomes.
  • Presented results provide the starting point for future research in the fields of corporate finance and the economics of innovation in a European context potentially also fruitful for other related fields of science, such as psychology, behavioral economics, corporate governance, and political science.

Policy implications

Government

  • Exclusively targeting the level of available funding is not an efficient strategy to improve innovation processes and inventing activities comprehensively.
  • Sufficient but not excessive funding, as well as reliable safety grids but no arbitrary guarantees, would create innovation-friendly environments.
  • Government programs need more structure to assure that government initiatives do not lead only to more finance available for research and development initiatives.
  • Favorable access to financial resources should be granted conditional on binding objectives that ensure the efficient use of deployable resources. This can help to crowd out marginal inventions of low quality and market value.
  • Potentially beneficial decisions have diverse – and possibly undesirable – effects on inventive activities. As such, facilitating access to funding affects the types of patents filed.

Management

  • The qualitative dimensions of patented inventions are partly driven by agency considerations: Excess financial resources might induce firms to invest in less valuable projects; firms should implement mechanisms that circumvent these inefficiencies.
  • Incentive schemes targeting quantitative, as well as qualitative dimensions of firms’ measurable inventive activities, should be introduced.

 

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