The financing of research and development

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.