7. Policy environment and demand for innovation

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In most countries, large innovating firms are more likely to benefit from public support for innovation than their SME counterparts.

The policy environment plays an important role in encouraging factors that promote the supply and demand for innovation in the economy. Access to finance and markets are among the main challenges experienced by firms aiming to introduce new products or adopt new and improved practices.

Young innovative firms encounter difficulties in obtaining seed and early stage financing because of uncertain profit expectations and riskier growth perspectives. Venture capital investments have not recovered to pre-crisis levels in most countries and showed few signs of improvement in 2016. Likewise, public equity markets have remained stagnant in recent years (OECD, 2017b). There are wide differences in the size of venture capital activities across countries. Relative to the size of the economy, venture capital investments in Canada, Israel and the United States are much higher than those found in Europe. It should also be noted that venture and growth capital investments are much less commonly used than other funding sources, such as bank lending, asset-based finance or trade credit.

Participation in international and public sector markets is a major source of demand for innovation. Access to both types of markets is more common among larger firms than among SMEs and, with remarkably few exceptions, is far more likely among innovative than non-innovative firms.

In addition to providing a source of demand for new products, governments support innovation by subsidising the cost of innovation activities in firms. In most countries, large innovating firms are more likely to receive public support for innovation than their SME counterparts, especially because the latter are less likely to undertake R&D-based forms of innovation.

Definitions

Venture capital is private capital provided by specialised firms acting as intermediaries between primary sources of finance (insurance, pension funds, banks, etc.) and private start-up and high-growth companies whose shares are not freely traded on any stock market.

Participation in international markets is defined as firms selling goods or services to customers abroad. Public sector markets refer to government-controlled organisations such as local, regional and national administrations and agencies, schools, hospitals and government service providers.

Public support for innovation includes financial support via tax credits or deductions, grants, subsidised loans and loan guarantees. Countries use slightly different formulations of this question.

Measurability

Data on venture capital are drawn from national or regional venture capital associations and commercial data providers. There is not a standard international definition of venture capital or the breakdown by stage of development. The OECD Entrepreneurship Financing Database aggregates original data to fit the OECD classification of venture capital by stages.

Questions included in innovation surveys provide evidence of the markets served by business and the extent to which they receive government support such as grants, subsidised loans and loan guarantees. The OECD has recently explored ways to measure the link between public procurement and innovation (Appelt and Galindo-Rueda, 2016), and recommends the use of targeted questions and innovation survey microdata to investigate the relationship between demand and innovation. The ongoing revision of the Oslo Manual on measuring innovation in firms is addressing requests for guidance to collect comparable evidence on the external drivers of business innovation.