Evidence on the “funding gap” for R&D issurveyed. The focus is on financial market reasons for under investment in R&D that persist even in the absence of externality-induced under investment. The conclusions are that 1) small and new innovative firms experience high costs of capital that are only partly mitigated by the presenceof venture capital; 2) evidence for high costs of R&D capital for largefirms is mixed, although these firms do prefer internal funds for financing these investments; 3) there are limits to venture capital as a solution to the funding gap, especially in countries where public equity markets are not highly developed; and 4) further study of governmental seed capital and subsidy programs using quasi-experimental methods is warranted.
From Working paper, published on 31-01-2002
Original document URL: http://elsa.berkeley.edu/~bhhall/papers/BHH%20OxREP02%20R&DFinance.pdf