Abstract

It is generally held that “…a strict reliance on a market system will result in underinvestment in innovation, relative to the socially desirable level” (Martin & Scott, 2000, p. 438). Innovation is essentially a speculative process. In the main, resources must be committed prior to revenue receipts (Brophy & Shulman, 1993). Furthermore, costs and revenues are inevitably difficult to anticipate with any precision (Moore and Garnsey, 1993). In research and development projects the ‘assets’ purchased are frequently idiosyncratic, with limited scrap or resale value (Tylecote, 1994; Baldwin et al, 2002). Moreover, whilst “…large firms may diversify their innovative projects and obtain more stable cash flows” (Giudici & Paleari, 2000, p. 40), small firms are, more often, constrained to ‘put all their eggs in one basket’, developing single research projects that require considerable funding, relative to turnover base. The consequence of the foregoing is a high degree of project risk, in the face of an uncertain return. Accordingly, “…there is bound to be some discrimination against investment in inventive and research activities” (Arrow, 1971, p. 153), and such discrimination may be most marked in the small firm sector. Thus, the objective of this paper is to investigate the funding environment of innovative ventures, in the Beijing area of China.

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