5. Financing for Innovation

Question 1

Intellectual property (IP) rights

Answer 1

• assets which are legally protected
• patents, designs, trademarks, copyrights
• do not refer to ideas created in the human mind but to how the idea is materialized

Question 2

Value of protection through IP

Answer 2

• exclusive rights/monopolistic position
• temporary
• ensures return to R&D and marketing investments

Question 3

Patents

Answer 3

Right granted by government to protect technical innovations from others making, using, selling, or importing the protected invention.

• covers means which achieve a function
• requirements to be granted:
  - novelty
  - non-obviousness
  - utility
• lasts for 20 years max

Question 4

Trademark

Answer 4

A recognizable sign, design, or expression, which identifies products or services of a particular source.

• covers

• brand names, logos, colors, sounds, smells
• product and container shapes
• 2D product artwork and labeling

• requirements

• distinctive character
• must go beyond functional
• actual use of identical mark in market

• valid for unlimited period of time (must be renewed)

Question 5

Copyright

Answer 5

Protects literary, scientific and artistic works from the time the work is created (tangible form of it)

• covers original works of authorship
• requires original work of authorship
• valid from time to creation in fixed form
• protects published and unpublished works

Question 6

How to orchestrate protection

Answer 6

• design in differentiated way
• start early in product development process to review elements of protection
• involve key stakeholders
• bring protected elements in use
• work strategically and tactically
• monitor and enforce

Question 7

Challenges to finance innovation projects

Answer 7

• innovation process is risky and uncertain
• return is extremely skewed and hard to measure
• agency costs are particularly high
• high percentage of intangible assets and limited use of collaterals
• returns to innovation cannot be appropriated exclusively by introducing firm
• innovation investments are very costly and difficult to reverse

Question 8

Stylized stages for entrepreneurial firms

Answer 8

1. Friends, Family, Gov’t and Universities
2. Business angels, angel groups
3. Early stage venture capital
4. Later stage venture capital
5. Public markets, mergers and acquisitions

Question 9

Public equity financing

Answer 9

Stock market financing interacts with firm innovation through two channels
• allocating financial capital to firms with greatest potential to innovate
• by financing innovative firms, the stock market directly shapes firm innovation

Question 10

Why the stock market rewards firm innovation

Answer 10

• A firm’s stock price reflects the discounted value of future cash flows
• stock price changes with investors expectations about the impact of firm innovation efforts
• New product introductions increase cash flows because they allow firms to gain a quasi-monopolistic position

Question 11

How firm innovation influences the stock market

Answer 11

Innovation inputs:
• R&D spending (+)
• Organizational culture (open for innovation) (+)

Intermediate innovation activites:
• Patents (+)
• New product preannouncements (+)
• Stage of process (-)

Innovation outcomes:
• New product introductions (+)
• New product riskiness (+)
• New product timing (+)

Question 12

Why the stock market influences firm innovation

Answer 12

Higher innovativeness:
• Public firms enjoy improved access to capital that should encourage innovation activity
• Financial capital and strategic capital

Lower innovativeness:
• Public firms must provide greater transparency that can be exploited by competitors
• Separation of ownership and control, which may lead to agency problems between shareholders and managers

Question 13

How the stock market influences firm innovations

Answer 13

Innovation inputs:
• Managers might cut investments in innovation to boost current earnings at the cost of future innovation

Intermediate innovation activities:
• Negative impact of stock market listing on patent quality

Innovation outputs:
• Public firms alter the risk of innovation projects and shift their innovation strategies away from breakthrough innovations towards more incremental innovations

Question 14

Survey by Graham, Harvey, and Rajgopal (2005)

Answer 14

• 80% of managers are willing to decrease R&D to meet earnings projections
• 55% are willing to delay starting a postive NPV project to meet earnings projects