Essays on financing business innovation

Abstract

The motivation for this thesis stems from the importance of innovation activity for the economy. The study consists of three related essays which provide new theoretical insights and empirical evidence on the use of public financial instruments for financing business innovation. Specifically, the study provides analysis of the potential role of the financing instrument, revenue-contingent loans (RCLs), with respect to innovation policy for business, in comparison to the conventional system of grant support.

The first essay, 'The theory of revenue-contingent loans for business innovations', takes a theoretical approach to investigating the influence of different financing options (debt, equity and RCLs) on cash flow and on the efforts of innovators, and provides a simple theoretical model for the use of RCLs in this capacity.

The second essay, 'Estimating government subsidies with revenue-contingent loans for business innovations in Australia', provides calculations of government subsidies associated with the use of RCLs as an innovation financing mechanism, using a recent sample of Australian firms with different design parameters. Subsidy estimates are provided for different levels of debt and a range of parameters, including interest rates, repayment rates, loan surcharges and grace periods.

The third essay, 'An impact evaluation of direct public financial support for business innovation activities in Australia', estimates for the first time the effects of direct public financial support (grants) for innovative businesses in Australia. Using Australian Bureau of Statistics (ABS) firm-level micro-data, estimates are derived concerning the extent to which firms increase innovation in response to direct government financial incentives. The results suggest significant positive effects for innovation outputs and, to a lesser extent, for business performance indicators. However, important caveats are explained with respect to the limitations of the methods used.