Promote financial system reform conducive to independent innovation

The speeding up of the transformation of the economic development mode requires not only a leading role given to science and technology but also promoting financial innovation. Without this, technological innovation is hard to accomplish. The experience of many developed countries shows that the organic combination of science, technology, and finance is a necessary condition for promoting S&T development, the transformation of achievements and industrialization, and upgrading the vitality of industrial innovation. A higher level of innovation capability and good financial innovation and service are important pillars and indispensable for building an innovative system. There is still plenty of room for this transformation in China. We must seize the opportunity to accelerate the pace of financial innovation so as to better promote technological and financial innovation and economic restructuring into the path of connotative development.

Functions and objectives of financial support system for innovation

With the continuous improvement of the financial support system for innovation and the deepening development of finance, the functions of the modern financial system have been continuously and its ability to support independent innovation have been continuously strengthened and enhanced. Here, based on a further understanding and definition of the functions of the modern financial system, the roles and objectives of one that supports this independent innovation are analyzed.

The functions of the financial system in a modern economy

Fundamentally, people’s understanding of financial functions mainly comes from practice, and deepens with its development. In the modern economy, the capital market plays an increasingly important role in financial activities. The financial system is gradually developed from being led by banks to being led by the capital market, and, at the same time, a large number of financial innovation activities are emerging. Based on the development of these activities, Zvi Bodie and Robert Merton (2000) summed up the functions of the modern financial system in seven aspects: (1) the financial system can play a role in transferring economic resources at different times, regions and industries; (2) manage risks—in the process of transferring resources, it also transfers risks, such as insurance, securities and futures, share options, financial swaps, and other derivative products; (3) provide liquidation and payment settlement services for transaction of goods, services, and assets; (4) reserve resources and divide stocks with mechanisms that bring together small families to form huge sums of money (such as stock markets and banks); (5) split shares in investments. The typical examples are stock companies and funds; (6) provide information. Information on asset prices and interest rates can help families and enterprises make economic decisions, as well as; (7) address incentives that help overcome moral hazards and adverse selection. Fundamentally speaking, it is more in line with the reality of today’s development, and logically more scientific, to analyze the functions of the financial system and its support system for innovation based on the characteristics of modern financial activities. Here, based on the above understanding and analysis, we analyze the role of financial support systems for S&T input.

Function of resource allocation

Whether in the early stages of the development of a commodity economy or in the modern market economy, resource allocation is the most basic function of finance. In the long history of development, the financial system, mainly banking in the past, has allocated social resources. In the early stages of the development of a commodity economy, the allocation of resources is mainly done through intermediaries such as banks, due to their dominant position, in order to absorb idle funds and regulate surplus and deficiency in them. During the early development period, indirect financing became the main mode of resource allocation and intermediaries played an important role in it. In the process of financial development, the capital market gradually occupies a leading position in financial activities, and the degree of economic financialization and financial securitization becomes higher and higher. Under such conditions, financial markets, especially capital ones, become more developed and direct finance becomes the main channel for resource allocation. What needs explaining is that in the process of allocating resources to the financial system, the display of interest rates and asset prices are all important signals. It is an important basis for guiding various economic entities, including enterprises, families, and various institutions, in making decisions. But interest rates and asset prices should not be considered as a function of the financial system.

Function of payment and settlement

The payment and settlement function is constantly evolving with the development of commodity trading. In the early stages of this, economic transactions basically occur in various currencies. However, as currency has developed into credit—with the drastic increase of economic transactions and the continuous improvement of credit mechanisms—the payment and settlement function, mainly in the banking system, is becoming more and more powerful. The payment system is characterized by more completeness and varied means with greater efficiency. Today, money has developed into an electronic form, and a nationwide, efficient payment and settlement network has been formed. This system also directly constitutes the core component of a country’s financial infrastructure, and directly affects its level of economic efficiency. Therefore, in a market economy, payment and settlement has become one of the most important functions of the financial system.

Function of risk management

In the process of financial development, the function of risk management is very obvious. Firstly, there are many institutions that specialize in this, such as insurance companies, which provide insurance for uncertainties and risks in economic life; credit guarantee agencies, which provide guarantees for various loans, etc. Secondly, in order to prevent risks and ensure the safety of assets, some banks also require mortgages or guarantees by agencies or other economic entities. Thirdly, in order to evade transaction risks, derivative tools such as futures and options have gradually emerged in financial activities and have been rapidly applied in commodity and financial transactions. Fourthly, the fluctuations of interest and exchange rates, caused by the liberalization of finance, have also lead to new innovations, such as the emergence of various risk management instruments, including currency and interest rate swaps; floating-rate bonds; and so on. It can be said that under the conditions of general uncertainty and risk in all economic and financial operations, the risk management function is vital.

Function of incentive

If the allocation of resources is the basic function of the financial system, then the incentive1 role is derived from it. Since investment is a part of financial activities, in order to ensure stability and profitability of funds invested, on one hand, there is a need for risk management, while on the other hand, we must use incentives to ensure the steady profitability of assets. Under the conditions of a market economy, equity and debt are two important ways of financing and are also the basis for the implementation of incentives and controls. These two modes not only affect the behavior of managers through their own mechanisms, but also play an incentive role by affecting the enterprise governance structure due to their proportional relationship. As people’s understanding of asymmetric information has matured, the incentive function has been further demonstrated. In the financial system, there are ways to use instruments and contracts to stimulate, including introducing stock options into operating enterprises so that the owner and operator’s goals are consistent, in order to reduce commission-agency costs as much as possible; as well as the introduction of an “equity-kicker”2 clause in the loan agreement to limit the conflict of interests between shareholders and creditors, allowing creditors to share profits by a certain percentage or convert the loan into a certain number of shares—changing creditor’s rights into equity, before the loan is fully repatriated.

From the analysis above, we can conclude that the functions of the financial system can be broadly summarized as resource allocation, payment and settlement, risk management, and incentive. Among them, the first is the most basic. With economic, technological, and financial development, the other functions are more and more reflected, and it can be said that they are manifested under the conditions of highly developed financial markets.

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