Public policy influence on the finance-innovation relationship

In order to mobilize private equity funds, policy makers possess a set of instruments, ranging from regulation, economic and voluntary instruments that are part of a ‘policy mix’ (Borras & Edquist, 2013; Flanagan, Uyarra, & Laranja, 2011b; Magro & Wilson, 2013; Mathews et al., 2010a; Veugelers, 2012a). An overview about the policy measures discussed in this article can be drawn from Table 5. On the one hand public policy is considered a main driver for market development as it adjusts institutions and supports specific sectors by using technology-push and demand-pull mechanisms (Criscuolo & Menon, 2015; Hoppmann et al., 2013; Olmos, Ruester, & Liong, 2012; Polzin et al., 2015; Tsoutsos & Stamboulis, 2005). Olmos et al. (2012) discuss policy measures and financing instruments to induce cleantech innovation, highlighting subsidies, loans, equity investments and tax-credits as suitable. Hoppmann et al. (2013) particularly argue that deployment policies leads to a shift of investments in companies to pursue more mature technological trajectories limiting their investments in novel explorations (‘investor effect’) which is valued by VC investors (Mary Jean Burer & Wustenhagen, 2009). Finally Veugelers (2012a) and Chrisculo & Menon (2015) find that deployment measures focusing on the long-term are conducive to innovation and VC investments in cleantech. This corresponds with research into policy implementation which highlights regulatory uncertainty and policy risk appear as major barriers (Luthi & Wustenhagen, 2012a; Marcus, Aragon-Correa, & Pinkse, 2011).

United States


Type of policy


(Examples discussed in

(Examples discussed

this paper)

in this paper)

Innovation policy (Market pull)

(Marry Jean Burer & Wustenhagen, 2009; U. C. V. Haley & Schuler, 2011; Hoppmann et al., 2013; Peters et al., 2012b)

Cash rebates, direct investments, Loan guarantee program (LGP), subsidies,

Tax incentives, Feed-in tariffs, subsidies, Public (institutional) investments





(Marry Jean Burer & Wustenhagen, 2009; Olmos et al., 2012; Wustenhagen & Bilharz, 2006b)

R&D support, subsidies, tax credits

R&D support, subsidies, tax credits



(Bottazzi & Rin, 2002; Da Rin, Nicodano, & Sembenelli, 2006b; Lerner & Tag, 2013b)

Calpers/Calsters (Pension fund mandates)

VC policy framework (general conditions)




Not discussed in the relation to (cleantech) innovation

AIFM, Dodd-Frank- Act, Volcker rule

Basel III, Solvency II, AIFM

Table 5 — Overview of policy measures discussed

On the other hand prior research on the complex interactions between financial markets, innovation policy and innovation has focused on the VC-policy relationship (Bottazzi & Da Rin, 2002; Da Rin et al., 2006b; Lerner & Tag, 2013a). These studies compare European and US VC markets, highlighting favourable policy measures for creating VC markets such as adjustments of capital gains tax and capital market development (Bottazzi & Da Rin, 2002; Da Rin et al., 2006b). Lerner (2002, 2009) finds that in the US while designing supportive VC environments, policy makers lack an understanding of the entrepreneurial and investments process and criteria being used by investors. Recently, Lerner & Tag (2013a) compared the VC financing systems of the US and Sweden, highlighting key institutions such as the legal environment, financial market development, taxation, labor market regulations, and public R&D spending as most relevant for the creation of active venture capital markets. One of their findings relates a thriving VC industry to exit opportunities in developed financial markets. They also found positive influence of deregulation, e.g.

allowing pension funds to invest in VC (Gompers & Lerner, 2001). However, tightening regulation has not been studied as an influencing factor for PE investments (Lerner & Tag, 2013a).

We bridge two streams of literature that looked at the relationship between VC/PE and the influence of policies on VC/PE investments (in the cleantech sphere). From a systemic perspective, innovation in clean technologies is influenced not only by innovation-oriented policies but also by financial policies targeting other actors in the financial markets through interdependdencies (see also the discussion of systemic problems by Edquist, 2011; and K. M. Weber & Rohracher, 2012). We therefore emphasize the role of equity finance and financial regulation of institutional investors. Accordingly, financial policy potentially has an impact on innovation outcomes. In this paper, we investigate systemic by focusing on direct and indirect effects of financial policy and innovation-oriented policies in the CT area in a cross-country comparison. Our stylized theoretical model that depicts the main actors and relationships in the equity-ecosystem for financing (cleantech) innovation can be drawn from Figure 8.

— Theoretical framework

Figure 8 — Theoretical framework

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