Abstract

Evidence on the ‘funding gap’ for R&D is surveyed. 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 (i) small and new innovative firms experience high costs of capital that are only partly mitigated by the presence of venture capital; (ii) evidence for high costs of R&D capital for large firms is mixed, although these firms do prefer internal funds for financing these investments; (iii) 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 (iv) further study of governmental seed capital and subsidy programmes using quasi‐experimental methods is warranted.

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