Research context

The overarching aim of this thesis is to explain the role of alternative investments in supporting the growth of a sustainable economy and recognizing levers that policymakers, managers and entrepreneurs could use for further accelerating green innovation through finance. Thus, it considers the activity of VC, PE and infrastructure investments in the field of clean technologies and renewable energies, and furthermore, looks for possible policy measures and regulatory interventions to strengthen the investment environment. Accelerating green innovation for a more sustainable future and a transition to a green economy has been a consistent request recently (Heck et al., 2014; Mowery et al., 2010a; OECD, 2011; Stern, 2006).

The clean technology industry emerged over the recent decades. Patterns of technological change and the entry of new innovative firms into the industry constitute this development. Lack of legitimacy is a key problem in the early years of an industry and has to develop though the help of emerging institutions. Based on the maturing clean technology industry a sustainability transition of the economy has been enabled (Aldrich & Fiol, 1994; Audretsch, 1995; Avnimelech & Teubal, 2006; Hoffman, 1999; F. Malerba, Nelson, Orsenigo, & Winter, 1999). The transition to green industries is a socio-technical transition changing not only technologies but also institutional structures and user practices. This change is triggered by innovation on the one hand and by policy changes induced by cultural shifts on the other hand. “Sustainability transitions are long-term, multi-dimensional, and fundamental transformation processes through which established socio-technical systems shift to more sustainable modes of production and consumption” (Markard et al., 2012, p. 956). The sustainability transition is key to accelerating green innovations (Farla, Markard,

Raven, & Coenen, 2012; Hoppmann, Huenteler, & Girod, 2014; Jacobsson & Bergek, 2004; Markard et al., 2012; A. Smith, VoB, & Grin, 2010).

External sources of finance, VC or PE, as well as, public financing activities have played a crucial role in the development of many innovative technologies and emerging industries (Kenney, 2011a; Mazzucato, 2013a; O’Sullivan, 2005; Perez, 2002a; Wonglimpiyarat, 2011; Samara, Georgiadis, & Bakouros, 2012; Mina, Lahr, & Hughes, 2013; Hirsch-Kreinsen, 2011). Challenges associated with the transition towards a low-carbon economy are multifaceted. But lack of financing has proven to be one of the major barriers for green innovation (Howell, 2014; Iyer et al., 2015; Leete, Xu, & Wheeler, 2013; Stucki, 2014). Regulatory interventions have been administered to amend such barriers like market failures and stimulate environmental innovation in clean industries (U. C. Haley & Schuler, 2011; Veugelers, 2012a).

Green innovation in the manifestation of clean technologies will play a key role for this transition (for a literature review on green innovation, see Schiederig, Tietze, & Herstatt, 2012). This thesis focuses on industries usually classified in the clean technology or renewable energy sector. Nevertheless, the boundaries of the so called clean technology sector are not definitive. Researchers found ways to describe the variety of included market participants. A comprehensive yet illustrative definition by O’Rourke explains: “Cleantech companies develop, produce and disseminate goods and services that improve the environmental performance of the system to which they are applied.” (2009, p. 109) (Caprotti, 2012; O’Rourke, 2009; Pernick & Wilder, 2007).

This thesis looks at the interplay of finance, innovation, and policy along the innovation chain (see Figure 1) and focuses on possible means to accelerate green innovation. The stages technology generation, technology commercialization and technology diffusion and their corresponding financial or policy measures are the backbone to this work. The changing innovation environment demands for specific financial sources and targeted policy measures (Auerswald & Branscomb, 2003; Borras & Edquist, 2013; Brown, 1990; Wustenhagen & Menichetti, 2012).

— Role of innovation, finance, and policy in the innovation chain

Figure 1 — Role of innovation, finance, and policy in the innovation chain

During the technology generation stage main sources for finance are mostly of public origin or combinations of public and private origin. Especially in the transition from science to business, the public actors need to be heavily involved (Pisano, 2010). R&D is a costly endeavor, and more often support mechanisms from regulators have to support innovation efforts. In the generation phase, technology push policies have to strengthen the innovation environment (Peters, Schneider, Griesshaber, & Hoffmann, 2012a; Samara et al., 2012). Nevertheless, picking winners or losers through government policy should be avoided (Aghion, David, & Foray, 2009; Ahman, 2006).

Public policy and financing support can still play a role in risky areas of the technology commercialization stage. Still, private investments through business angels, venture capitalists and public-private partnership investments take over during that stage (Brown, 1990; Oakey, 2003). The private risk investors play an important role. While they take risk they expect adjusted returns in exchange. Limiting the availability of private finance is the so-called “Valley of Death”. Market acceptance risks and scaling risks diminish return expectancies and discourage angel and VC investors (Auerswald & Branscomb, 2003; Da Rin, Hellmann, & Puri, 2011; Miller & Garnsey, 2000). Especially through this situation the importance of private risk capital investors for supporting innovation and entrepreneurship in the commercialization stage is emphasized. Hence, regulatory interventions appear to be able to bridge this financing gap (Samila & Sorenson, 2010a).

In the clean technology field, diffusion is hindered by a multitude of different barriers (Negro, Alkemade, & Hekkert, 2012; Tsoutsos & Stamboulis, 2005). Even as most technology risks and market acceptance risks have been resolved, finance is still a problematic issue. Thus, clean technology and renewable energy technologies are heavily subsidized even at later stages of the innovation chain (Badcock & Lenzen, 2010; Bolinger, Wiser, Milford, Stoddard, & Porter, 2001) These policy interventions have shown to have high influence on inducing green innovations, especially conducive are demand pull mechanisms (Barreto & Kemp, 2007; Peters et al., 2012a; Veugelers, 2012a) In contrast, high regulatory exposure can prevent investors from financing clean technologies (Chassot, Hampl, & Wustenhagen, 2014). Maturing financial markets play a role especially in later stages of technology diffusion. Less risky types of financing take over during the diffusion stage, while private equity, infrastructure and partly public equity gain importance (Comin & Nanda, 2014).

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