Quarterly research and innovation literature review: The financing of innovation

Financing innovation is a particularly challenging task. The specific nature of the innovation output (i.e., non-excludability and partly non-rivalry) makes innovation activities more risky in the eyes of private investors. Production processes of companies operating in knowledge-intensive sectors are characterized by high uncertainty, and these companies typically take a longer to deploy their results on the market. These specificities often translate into significant financial constraints preventing innovative firms from securing external financial resources and forcing them to rely on internal resources, limiting their innovation potential.

Being able to attract riskier and more patient investments is of pivotal importance. Although the COVID-19 crisis did not produce significant disruptive effects on the EU venture capital market, a number of factors keep holding the EU back in realizing its innovation potential. Understanding the relationship between firms’ innovation activities and different types of financing sources is also key to improve access to the financial resources needed to successfully transition toward a green and digital economy.

This literature review looks into different aspects of innovation financing, relying on both qualitative and quantitative analyses. The selected papers cover a broad range of topics, looking into the different determinants of financial constraints to innovative firms, as well as into the relationship between innovation activities and different financing instruments, with a focus on green financing. The review also introduces the results on access to finance of the 2022 edition of the Science, Research and Innovation Performance of the EU report.

Contributors: Valentina Di Girolamo, Alessio Mitra, Océane Peiffer-Smadja and Julien Ravet.