Corporate Innovation Finance: R&D Investment, Patent Value, and Innovation Capital

Abstract

Innovation—the creation and commercialization of new knowledge, products, and processes—is the primary driver of long-run economic growth, yet innovation investment faces distinctive financial frictions that make it undersupplied relative to the social optimum. R&D investment is characterized by: high uncertainty about outcomes; long time horizons between investment and commercialization; limited collateral value (knowledge cannot be repossessed); and positive externalities that prevent innovators from capturing the full social returns to their discoveries. These characteristics make R&D difficult to finance through conventional debt markets and create a role for equity financing, venture capital, and public R&D support. This paper reviews the financial economics of corporate R&D investment, the evidence on financing constraints and innovation, patent portfolio valuation, and the measurement and equity valuation of intangible capital.