funda 15 Flashcards
(30 cards)
What are the main financial frictions affecting R&D financing?
Uncertainty: Outcomes and probabilities of R&D projects are unclear.
Firms must invest to discover potential outcomes.
Skewed Returns: Innovation returns are uneven, with few projects yielding high rewards.
Traditional evaluation methods fail to address this skewness.
Asymmetric Information:Innovators know more about the project than financiers.
Contracts fail to fully mitigate this information gap.
Dependence on Human Capital: Innovation is embedded in employees, who may leave, increasing project risks.
How do high-tech, publicly-traded firms finance their R&D investments?
Primarily financed through internal cash flows and external equity markets.
During stock market booms, these firms expand their R&D investments due to increased funding availability.
Negative banking shocks shift focus from disruptive to incremental innovations, reducing long-term innovation potential.
How do banks support innovation despite traditional constraints?
Patents as Collateral: Patents can secure cheaper debt financing.
U.S. Bank Deregulation:
Allowed financially constrained firms to access credit.
Encouraged riskier, more innovative projects.
Limitations: Banks prefer financing large, mature firms with more collateral, limiting access for startups and smaller firms.
What happens to innovation when a firm transitions from private to public?
No Impact on Innovation Rate: The overall rate of innovation remains constant.
Drop in Novelty: Novelty (measured by patent citations) decreases by 40% due to:
Departure of skilled scientists.
Shift in R&D focus toward less novel projects.
Short-Term Incentives: Public companies prioritize short-term goals, often reducing exploratory R&D.
Role of Institutional Owners: Long-term investors promote R&D investments.
How do stock markets influence innovation?
Positive Effects:
Stock market booms provide resources for R&D expansion.
Institutional investors encourage long-term innovation.
Negative Effects:
Firms may cut R&D spending to meet short-term analyst expectations.
Public market incentives may prioritize immediate returns over groundbreaking innovations.
How do analysts’ expectations affect firms’ R&D investments?
Firms often reduce R&D spending to meet analysts’ short-term earnings forecasts.
This prioritization of short-term financial performance may undermine the firm’s ability to pursue disruptive, long-term innovations.
How do startups differ from established firms in innovation focus?
Startups focus on explorative innovation, aiming for breakthrough and disruptive ideas.
Established Firms focus on exploitative innovation, enhancing existing processes and products.
How does venture capital impact startup innovation?
Kortum & Lerner (2000): An increase in venture capital inflow (e.g., due to changes in pension fund regulations) raised startup patenting by 8%.
Venture capitalists support startups through:
Monitoring,
Taking board seats, and
Implementing contracts.
What challenges do venture capitalists face in funding startups?
Assessing Potential: Even experienced VCs struggle to predict early-stage success.
Staged Investments: Investments are made in phases, acting as a real option to reduce risk.
Financing Risk: A single VC often lacks the capital to fund a startup to profitability, requiring additional investors for later stages.
Why do governments promote innovation, and what are the challenges?
Positive spillovers: Innovations benefit society beyond the innovator.
Business-stealing: Drives competition and further innovation.
Financial constraints:
Intangible assets can’t be used as collateral.
Asymmetric Information: Risks and rewards are not fully understood by investors.
Challenges: Governments often struggle to identify the most promising projects.
What are tax incentives for R&D, and how effective are they?
Governments offer tax breaks like super-deductions (e.g., 150%) to encourage R&D investment.
Effectiveness:
A 10% tax price reduction results in at least a 10% increase in R&D spending long-term.
Issues: Some firms use creative accounting to exploit these incentives.
What are patent boxes, and how do they influence firms?
Patent boxes provide lower tax rates on revenues from patented innovations.
Evidence: Firms may manipulate the location of research labs to benefit from lower tax rates, rather than driving genuine innovation.
How do public research grants impact innovation?
Grants target promising researchers, projects, or socially critical issues.
Challenge: Constructing a counterfactual—determining what would happen without the grants—is difficult.
Effects: Public R&D grants lead to:
More patents,
Higher private R&D investment, and
Greater chances of startups attracting venture capital.
What is the difference between crowd-out and crowd-in effects in public R&D funding?
Crowd-Out: Public funding replaces private R&D investment, with no net gain.
Crowd-In: Public funding complements private R&D, encouraging more investment.
Evidence favors crowd-in effects, showing that public R&D funding stimulates additional private R&D spending.
What are the initial funding sources for new technology ventures?
Personal savings, family, friends, and credit cards.
Government grants or loans.
Crowdfunding platforms like Kickstarter, GoFundMe, and Indiegogo.
What are the main types of crowdfunding, and how do they differ?
Donation-Based: No return expected by backers.
Rewards-Based: Backers receive products or services.
Equity-Based: Backers get company ownership in return for contributions.
Fact: Crowdfunding is expected to grow to $300 billion by 2025.
How do accelerators like Y Combinator support startups?
Provide cohort-based training, resources, and mentoring over 3–4 months.
Offer seed investment ($30k–$50k) in exchange for equity.
Facilitate a Demo Day where startups pitch to investors.
Focus on small, diverse teams instead of individual founders.
What is the role of angel investors and venture capitalists (VCs) in financing startups?
Angel Investors: Provide seed funding (<$1M), often the first check.
Example: Andy Bechtolsheim (Google), Peter Thiel (Facebook).
VCs: Invest larger amounts (> $1M) in multiple early stages, requiring board control and equity ownership.
What are the main sources of funding for scientific research?
Public:Government agencies (e.g., NSF, NIH, ERC).
Universities and research institutions.
Private: Corporations.
Crowdfunding.
Hybrid: Foundations and nonprofit organizations.
How has public funding contributed to major innovations?
Smartphone Innovations: GPS and touchscreens from U.S. Defense Department research.
Tesla Batteries: Developed from a U.S. Department of Energy grant.
Google Search Algorithm: Boosted by National Science Foundation funding.
Pharmaceuticals: NIH-funded research led to many new drugs.
Does it matter who funds scientific research?
Yes, funding sources influence innovation outcomes.
Research (Babina et al., 2023) shows federal funding shocks affect university patenting, entrepreneurship, and publications.
What are challenges governments face in promoting innovation?
Ensuring positive spillovers without excessive business-stealing.
Addressing financial constraints where intangibles cannot serve as collateral.
Designing policies to effectively assess and support promising projects.
What are the key data sources and characteristics of the dataset used to analyze the effects of federal funding shocks on university research?
Data Sources: The dataset combines information from multiple sources:
◦IRIS UMETRICS program: Provides data on research grants and employees at 22 universities.
◦U.S. Census Bureau: Provides data on career outcomes and business information.
◦PubMed: Provides data on publications.
◦Federal Audit Clearinghouse: Provides data on aggregate federal funding at the CFDA program level.
*Grant Data: Includes details on all research grants at participating universities from 2001 to 2017, including:
◦Expenditures by employee-year.
◦Funder’s name.
◦Catalog of Federal Domestic Assistance (CFDA) codes, which identify federal assistance programs and related research fields.
*Researcher Data: Tracks individual researchers, including:
◦Occupation (faculty, graduate student/postdoc/research scientist, undergraduate student, or staff).
◦Department.
◦Career histories and job information from the U.S. Census Bureau.
*Patent Data: Links researchers to patents, including information on:
◦Number of patents.
◦Forward citations.
◦Generality of patents.
*Publication Data: Links researchers to publications in PubMed, including information on:
◦Journal impact factor.
◦Number of forward citations.
◦Whether the publication is basic or applied.
*Career Outcome Data: Tracks whether individuals become high-tech entrepreneurs or work at a university, using data from the U.S. Census Bureau.
*Sample Construction:
◦Balanced panel of researchers observed before and after being paid on a grant from 2001-2017.
◦Main analysis sample consists of about 18,000 individuals, with 1,300 treated and 16,700 control individuals.
◦Researchers are “treated” if they receive more than half of their funding from a CFDA code experiencing a large, temporary, negative funding shock. Otherwise, they are in the control group.
*Funding Shocks: The study focuses on large, temporary, negative shocks to aggregate federal research funding at the CFDA program level.
◦A shock is defined as a decline of at least 40% in total federal funding in a given field (CFDA code) from the previous year, followed by a return to pre-shock levels, with no significant funding changes in the two years prior to the shock.
◦Aggregate federal funding at the CFDA program level is obtained from the Federal Audit Clearinghouse
Babina pp
What are the major empirical challenges in studying the causal relationship between federal funding and university research outputs?
Unobserved Researcher Characteristics: High-quality researchers may be more likely to receive federal grants, which can bias results if not controlled for.
* Unobserved Technological Shocks: Scientific fields with more technological opportunities might receive more funding and produce more innovation outputs, confounding the effect of the funding itself.
