Financial Factors Which Stimulate Innovation

Abstract

Because Innovation requires the commitment of resources to a development with highly uncertain net returns, the methodology of financial economics Is useful In understanding innovation, even to the point of suggesting a relationship between the Incidence and rate of Innovation and the state of key financial factors. Our model posits such a relationship, grouping the key financial factors under the headings of investment valuation and financing: the fundamental components of financial economics. The model argues that the incidence and rate of innovation are related to both valuation and financing factors as well as the Interactions between them. We present a structure for this model and suggest a LISREL methodology for empirically testing these financial factors.