Financial Aspects of Innovation

Economic costs & benefits of standardization

 Scale of economics
 Network effect – Direct and Indirect
 Locus of Competition – system vs components
 Product variety
 Sunk costs of adaptation
 Expectations and coordination
 Rarity of innovation
 Life cycle of innovation
 Financial background for failure of innovations

 uncertainty coupled with incomplete markets may

make a real options approach to the R&D investment
decision more appropriate;
 the cost of capital may differ by source of funds for
non-tax reasons;
 the cost of capital may differ by source of funds for
tax reasons;
 the cost of capital may also differ across types of
investments (tangible and intangible) for both tax
and other reasons.
 Cost capital factors

 asymmetric information between innovator and

investor;
 moral hazard on the part of the innovator or arising
from the separation of ownership and management;
 tax considerations that drive a wedge between
external finance and finance by retained earnings.
 Financial concerns & metrics

 ROI
 ROA
 EOI
 EOR
 EOA
 Cash flow vs Capital ratios
 Return ratios & patterns
 Break Evens
 Stake holders : short, mid & long term benefits
 Reference

 Scott Shane, Handbook of Technology and

Innovation management, chapter 9 & 15, Wiley
publications.