Question

Why is financing innovation more difficult than financing other kinds of investments? Please discuss by pointing out the unique features of innovation.

Answer 1

Answer: The financial innovation activities are more difficult to finance compared to other types of investment for many reasons. The financial innovation causes an intangible asset that does typically would not constitute accepted collateral in obtaining the funding from external resources. The market and the technological uncertainty of innovation activities cause the returns to investment be highly uncertain, creating huge issues for the adjustment methods on standard risk used by the fund providers. The external funding is more difficult due to the imperfections in market. It is mainly due to unique features of innovation which includes difficulties in assessment of the financing innovation projects by the external financiers or that projects for innovation generate only some assets that can be applied to collateralise loans