Financing of Innovations by Young Firms

Financing of Innovations by Young Firms


KfW Group

Period: 01.01.2010 – 31.03.2011

Companies that newly enter the market face the challenge of generating a competitive advantage over their rivals. Research and development activities (R&D) as well as the implementation of product or process innovations form a substantial mechanism in order to differentiate from competitors and to gain a competitive edge. Yet, R&D and innovation activities generally require investment and/or the employment of human resources.Previous analyses examining the financing of innovations refer to established companies which are likely to realise a substantial amount of sales and to have accumulated revenue reserves in preceding years. For established companies it was shown that the financing of innovation activities generally results from sales or revenue reserves of previous years (i.e. from internal financing).In contrast, young firms generate no or a very low sales volume in the first years succeeding their market entry. Due to their short existence, there are no revenue reserves from previous years. This applies in particular to the group of high-tech industries, as the development of a marketable product can take several years. Therefore it is probable that young companies have to draw more on external financing (i.e. on capital from owners and on external funding such as bank loans or venture capital) for their innovation and R&D activities than established ones.The objective of the project is to investigate whether young, innovative companies need particular financing structures and to what extent the financing structure varies between companies with different innovation degrees (“only” product innovation, market novelties, own R&D activities). In doing so, a possible interdependence between financing and innovation will especially be considered: A certain financing structure is on the one hand the result of the financing requirement due to innovation activities; but on the other hand it allows the carrying out of innovation activities in the first place.The project is based on the data of the first two waves of the KfW/ZEW Start-up Panel.

Project members

Helmut Fryges

Helmut Fryges

Senior Researcher

To the profile
KfW Group, Frankfurt am Main, DE

Selected Publications

The Interdependence of R&D Activity and Debt Financing of Young Firms

Fryges, Helmut, Karsten Kohn and Katrin Ullrich (2015), The Interdependence of R&D Activity and Debt Financing of Young Firms, Journal of Small Business Management (JSBM) 53(S1) , 251-277