essay on finance and innovation 2010
The fates of the world of finance and the real economy strongly depend upon each
other. Financiers need entrepreneurs and business executives with profitable
proposals to invest in. Entrepreneurs need funds to realize their ideas. The separation
of these roles, and the specialisation thus made possible, is one of the defining
features of modern capitalism.
Many feel, however, that financiers and entrepreneurs have grown too far apart in
recent decades. The financial sector is said to have developed a logic of its own,
losing touch with the real economy. Demands from financial markets are felt to be
incompatible with the need to invest in new products and services. Criticism is
directed at different parts of the financial sector and ranges from a short-term
orientation of shareholders and financial managers to the danger of over-leveraging
by private equity funds and the reluctance of banks to provide loans for innovative
small and medium-sized enterprises.
Does finance follow?
We come from a period in which economists and policy makers simply assumed
that the financial sector always serves the real economy. As illustrated by this quote
of Joan Robinson: ‘Where the real economy leads, finance follows’. The dominant
view was that the financial sector responds smoothly to the needs of the real
economy, with maybe high tech start-ups as the notable exception.
From the 1990s onwards however a growing empirical literature suggested that the
state of the financial sector is as much a driver of economic development as it is the
result of it. The financial sector is an important element of the innovation system in
which firms operate. One in which frictions can occur that result in higher capital
costs, or even the total absence of capital. The recent financial turmoil and its
economic consequences have driven this discussion to the center of the policy
agenda. The problems seem to be larger for investments in innovation than for
other types of investment, due to their intangible nature, their high risk, the
dynamic environment in which they have to be made and the long time it often
takes for the benefits to materialise.
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Geupload op: 06 januari 2011
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