World Bank Group2015-11-242015-11-242012https://hdl.handle.net/10986/23140Innovation is the main driver of long-term economic growth. The accumulation of capital, whether in the form of physical assets such as plants and equipment, or through better human capital, cannot indefinitely sustain growth unless new products, services, processes, and/or business models are developed and implemented. This paper describes the actors involved and the types of funding available at different stages of the innovation process, the rationales for public intervention, and the advantages and disadvantages of some of the most commonly used policy instruments. Innovation activities are more difficult to finance than other types of investment for several reasons. Innovation produces an intangible asset that does not typically constitute accepted collateral to obtain external funding. Also, the technological and market uncertainty of innovation activities makes the returns to investment highly uncertain, creating significant problems for the standard risk adjustment methods used by providers of funds. This paper uses a streamlined version of an innovation process with three stages to categorize the different sources of finance available; in reality, considerable crossover takes places among instruments because innovation processes are not discrete.en-USCC BY 3.0 IGOACCESS TO FINANCEACCOUNTINGACCOUNTING STANDARDSADMINISTRATIVE COSTSADVANCED TECHNOLOGYADVISORY SERVICEAGENCY PROBLEMSALLOCATION MECHANISMALLOCATION MECHANISMSAMORTIZATIONAPPLICATION PROCESSASSET BASESASYMMETRIC INFORMATIONAVAILABILITY OF CREDITAVAILABILITY OF FINANCEBANK DEBTBANKING REGULATIONBANKRUPTCYBANKSBENEFICIARIESBENEFICIARYBIDSBONDSBORROWERBUDGET ALLOCATIONBUSINESS ANGELSBUSINESS INNOVATIONBUSINESS MODELBUSINESS MODELSBUSINESS OPERATIONSBUSINESS PLANBUSINESS PROCESSESCAPABILITIESCAPABILITYCAPITAL EXPENDITURECAPITAL EXPENDITURESCAPITAL FUNDSCLAIMANTCOLLATERALCOLLECTION OF INFORMATIONCOMPETITIVENESSCOMPLIANCE COSTSCONTRACT ENFORCEMENTCONTRACTUAL OBLIGATIONSCOORDINATION FAILURESCORPORATE GOVERNANCECREDIBILITYCREDIT GUARANTEECREDIT GUARANTEESCREDIT PROVISIONCREDITORSCUSTOMSDEBT FINANCEDEDUCTIBLEDEFAULT RISKDEVELOPING COUNTRIESDISBURSEMENTDIVERSIFICATIONDOMAINDUE DILIGENCEEARNINGSECONOMIC GROWTHELIGIBILITY CRITERIAEMERGING ECONOMIESENTREPRENEURENTREPRENEURSEQUIPMENTEQUIPMENT PURCHASESEQUITY FINANCEEQUITY FUNDSEXPENDITUREEXPENDITURESEXPROPRIATIONEXTERNAL CAPITALEXTERNAL FINANCEEXTERNAL FUNDINGEXTERNAL FUNDSFINANCIAL CONSTRAINTSFINANCIAL DEVELOPMENTFINANCIAL DISTRESSFINANCIAL INSTRUMENTSFINANCIAL INTERMEDIARIESFINANCIAL INTERMEDIATIONFINANCIAL MANAGEMENTFINANCIAL MARKETSFINANCIAL REGULATIONFINANCIAL RESOURCESFINANCIAL SUPPORTFIXED ASSETFIXED CAPITALFOREIGN DIRECT INVESTMENTGLOBAL KNOWLEDGEGOVERNANCE ISSUESGOVERNMENT BUDGETGOVERNMENT FUNDINGGOVERNMENT INTERVENTIONGOVERNMENT POLICIESGOVERNMENT SUPPORTGRANT FUNDINGGREATER ACCESSGUARANTEE SCHEMESHARDWAREHIGH INTEREST RATESHUMAN CAPITALHUMAN RESOURCESINCOME TAXINFORMATION ASYMMETRIESINFORMATION TECHNOLOGYINFORMATIONAL ASYMMETRIESINITIAL PUBLIC OFFERINGSINNOVATION POLICYINNOVATIONSINNOVATIVE FINANCIAL INSTRUMENTSINSTITUTIONAL FRAMEWORKINSTRUMENTINTANGIBLEINTANGIBLE ASSETINTANGIBLE ASSETSINTANGIBLESINTELLECTUAL PROPERTYINTELLECTUAL PROPERTY REGIMESINTELLECTUAL PROPERTY RIGHTSINTEREST PAYMENTSINTEREST RATEINTEREST RATESINTERNAL FUNDSINVENTIONSINVESTINGINVESTMENT IN KNOWLEDGEINVESTOR PROTECTIONIPIPOLEGAL PROTECTIONLIABILITYLICENSESLIQUIDATIONLOANLOAN GUARANTEEMANAGEMENT SYSTEMSMANUFACTURINGMARKET FAILUREMARKET FAILURESMARKET RISKMARKETINGMATURITYMOBILE APPLICATIONMORAL HAZARDMULTINATIONALNECESSARY SKILLSNETWORKSNEW BUSINESSNEW TECHNOLOGIESNEW TECHNOLOGYNONPROFIT ORGANIZATIONSONLINE BUSINESSESOUTSIDE INVESTORSPENSIONPENSION FUNDSPHYSICAL ASSETSPOLICY DESIGNPOLICY ENVIRONMENTPOOL OF BORROWERSPORTFOLIOSPOTENTIAL INVESTORSPRIVATE EQUITYPRIVATE INVESTMENTPRIVATE SECTORPRIVATE SECTOR FIRMSPRIVATE SECTORSPROCUREMENTPRODUCTION PROCESSESPRODUCTIVITYPROPERTY RIGHTSPROTECTION OF INVESTORSPROTOTYPEPROTOTYPESPROVISION OF CREDITPUBLIC MARKETSRDRATE OF RETURNREGISTRYREPAYMENTRESULTRESULTSRETURNSRETURNS ON EQUITYREVENUE MODELSRISK SHARINGSAVINGSSECURITIESSHAREHOLDERSHAREHOLDER VALUESHAREHOLDERSSMALL BUSINESSSMALL BUSINESSESSOLAR PANELSSOURCES OF FINANCESTANDARDIZATIONSTOCK MARKETSTOCK MARKETSSYSTEM FAILURESYSTEM FAILURESTANGIBLE ASSETSTARGETSTAXTAX CONCESSIONSTAX CREDITTAX CREDITSTAX DEDUCTIONSTAX EXEMPTIONTAX INCENTIVETAX INCENTIVESTAX OBLIGATIONTAX OBLIGATIONSTAX RATETAX SYSTEMTAX SYSTEMSTECHNOLOGICAL INNOVATIONTECHNOLOGY RISKTIME FRAMETRAINING FOR ENTREPRENEURSTRANCHESUSERUSERSUSESVENTURE CAPITALVENTURE CAPITAL FUNDSVOUCHERSWORKING CAPITALWorking PaperWorld Bank10.1596/23140