The role of finance in national systems of innovation

One of the most important institutional conditions for the process of innovation is the possibility of financing the process. This is not just a question of getting finance cheaper in one country compared to another. Rather there are some national, institutional factors in financial systems, which are important to firms, when they need to obtain finance for their investments in new technology. One might argue that the concept of a national financial system has apparently become less and less relevant due to internationalisation, deregulation and globalisation of financial markets in recent years. However, in spite of these trends there are still differences in the financial systems which are crucial to take into account. Risky investments in innovations are often initially financed internally. This goes especially for large companies, whereas small and medium sized firms may have less possibilities for self financing. However large companies also increasingly tend to use external finance. Higher R&D costs and shorter life cycles for most high technology product, make technology based firms more dependent on external finance. Underneath this very general statement however there are important differences, not only between the financial strength of firms, but also between countries. In some countries there is a stronger tendency to finance investments internally, and this makes firms less dependent on external finance. In the following discussion the focus will mainly be on external finance. My main purpose is to show that institutional differences between national financial systems are important to financing innovation.