The role of technological innovation, particularly in mitigating climate change has received growing interest in recent years (Arora, Romijn, & Caniels, 2014; Mingo & Khanna, 2014; Mowery et al., 2010a). In order to achieve a transition to a more sustainable economy, scholars have argued that at least part of the necessary innovations have to come from entrepreneurial ventures rather than large corporations (Garud & Karn0e, 2003; Hockerts & Wustenhagen, 2010b; Sine & David, 2003). This leads to two fundamental and interlinked challenges for the transition towards a low- carbon economy.

First, the single biggest problem for these entrepreneurial firms is access to finance (Lerner, 2002; Mina et al., 2013; Schneider & Veugelers, 2010; Stucki, 2014). Although recent changes in monetary policy by central banks have led to low interest rates and heavy injections of liquidity into financial markets (Belke, 2013), investments into innovative companies and in key enabling technologies for a sustainability transition (clean technologies, nano technologies and biotech) have only recently seen a slight recovery (McCrone, 2015). The drastic change in the investment © Springer Fachmedien Wiesbaden GmbH 2017

M. Migendt, Accelerating Green Innovation, Innovationsmanagement

und Entrepreneurship, DOI 10.1007/978-3-658-17251-0_3

landscape for cleantech can be observed through the continuous downturn in investments following the financial crisis of 2008. This change is particularly visible in early stage VC where the investment market almost disappeared (see Figure 7).

Global VC/PE investment in CT by stage in USD bn (Source

Figure 7 - Global VC/PE investment in CT by stage in USD bn (Source: McCrone, (2015))

Second, cleantech ventures exhibit specific characteristics, such as higher policy risk, asset-heaviness, slower scalability and corresponding long payback periods which have to be addressed differently by policy makers compared to other high-tech industries (Hargadon & Kenney, 2012; Hockerts & Wustenhagen, 2010b; Petkova, Wadhwa, Yao, & Jain, 2014). The literature on policy measures to stimulate innovation demonstrates that certain cleantech industries would not exist without market-pull regulations, such as the feed-in tariff (U. C. Haley & Schuler, 2011; Veugelers, 2012a; Polzin, Migendt, Taube, & von Flotow, 2015; Wustenhagen & Bilharz, 2006a).

Despite the importance of innovation by entrepreneurial ventures and the dependence on access to funding, there is little research that addresses the role of entrepreneurial finance in a larger picture, let alone the impact of policy (for an overview, see O’Sullivan, 2005; Hirsch-Kreinsen, 2011; Perez, 2002b). Most of this literature (also with regard to the cleantech focus) is limited to an analysis of the VC-entrepreneur relationship (Dimov, Holan, & Milanov, 2012; Kenney, 2011b; Petkova et al., 2014) and the policy-VC relationship (Bottazzi & Da Rin, 2002; Kortum & Lerner, 2000a; Lerner & Tag, 2013a). Yet, the source of funds that propels VC - institutional investors - is rarely studied by innovation scholars. Overall, equity finance for innovation has not been analyzed as an independent, let alone central element in the innovation-policy-nexus (for cleantech) (Kenney, 2011a; Mazzucato, 2013a; Wonglimpiyarat, 2011; Lerner, 2002, 2009).

Thus our research question reads as follows: How does the interplay between equity finance and corresponding policy measures influence (cleantech) innovation and entrepreneurship?

In this paper, we emphasize the importance of this hitherto-neglected role of finance for clean technologies (Cleantech, or CT) comparing the United States and Germany. We contribute to the literature through a comprehensive qualitative analysis of the policy-finance-innovation interdependencies and relationships by explicitly incorporating the financial sector, namely institutional investors. While innovation policy might try to foster financing of start-ups through certain innovation policy measures aimed at venture capital (VC) investors and private equity (PE), regulatory requirements in other subsectors, such as institutional investors, can counterweigh these positive effects. This stems from the fact that VC/PE investors refrain from risky investments into early stage technology ventures as a result of regulatory tightening of their own sources, namely institutional investors. We conclude with implications for theory and practice.

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