Working Paper: NBER ID: w20676
Authors: William R. Kerr; Ramana Nanda
Abstract: We review the recent literature on the financing of innovation, inclusive of large companies and new startups. 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 multi-stage 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.
Keywords: financing; innovation; debt financing; venture capital; startups
JEL Codes: G21; G24; L26; M13; O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| well-functioning financial markets (G10) | economic growth (O49) |
| financing constraints (G32) | rate of innovation (O35) |
| financing constraints (G32) | nature of innovation (O35) |
| bank distress (G21) | shift from radical to incremental innovations (O35) |
| bank financing (G21) | support for innovation (O35) |
| public equity markets (G10) | agency costs (G34) |
| agency costs (G34) | reduction in novelty of innovations (O39) |
| governance structures (G38) | adverse effect on innovation outcomes (O36) |
| multistage financing (G32) | facilitation of innovation (O35) |
| venture capitalists (G24) | shape innovation landscape (O35) |