Method and Data
In order to understand and analyze the interactions between policy and equity finance for (cleantech) innovation, we use a qualitative research approach. Our research covers the clean technology (CT) area, especially in the field of innovative companies funded by VC/PE capital or requiring external equity capital. These kinds of investments often are not publicly announced or tracked. Hence there is a scarcity of data, especially in emerging fields. Qualitative research approaches help to overcome the burden of insufficient available data and complex research settings including multiple actors and interdependencies (K. M. Eisenhardt, 1989; Yin, 2009). The cases Germany and the US have been chosen to illustrate the effects of different state and structure of equity markets on innovation activities in two relevant cleantech markets.
The cleantech sector has been growing rapidly which can be seen from the financial flows into the different CT asset classes (Figure 9). Starting from the early 2000s it was experiencing a boom, with rapid growth until the financial crisis in 2008. This slowed down the development only to recover shortly thereafter with a continuing growth, notably in asset finance and new electricity generating capacity (Ettenhuber, 2013; PwC Moneytree, 2014).
Figure 9 — Global new investment in CT in USD bn
The financial crisis, consisting of a housing bubble in the United States, bank insolvencies and national financial and economic turmoil was responded to with recovery policies for industry and restrictive financial policies in the US and Europe alike. On the financial side, these measures include Basel III, Solvency II, the Dodd- Frank Act, and the Volcker rule. On the industrial side, there was an unprecedented surge of government R&D and grant capital commitments to the CT sector which coincided with the shrinking bank-lending and VC/PE activities throughout the US, Europe and Germany in particular (see Figure 10). This highly supportive public environment for cleantech innovation aimed at maintaining economic stability and at accelerating growth while assisting efforts towards sustainability transition with measures such as cash rebates, direct investments, loan guarantee programs, feed-in tariffs and R&D support. Even though the CT sector, especially the deployment of technologies was supported, investment activity in the US and Germany declined over the years as can be observed (see Figure 10). After a continuous growth the numbers show a drastic decline 2010-2012. With regard to VC investments a slight recovery on a lower level is visible for the US. Investments in Germany on the other hand could achieve the level of 2005-2007. In 2014 the graphs show a steep recovery for PE investments in the US whereas in Germany a weaker recovery is visible.
Figure 10 - New investment in CT (USA and GER) in USD bn
These numbers provide the background for our analyses of the perception of equity investors, policy makers and innovators to analyse potential influencing factors such as technology-immanent or regulatory factors or the financial crises and corresponding measures.
-  Here we use the investments in clean/renewable energy technologies as a proxy for investmentsfor clean technologies in general. BNEF provides the most comprehensive database concerningdifferent asset classes for clean technologies (i.e. Asset finance, VC/PE, Mergers&Acquisitions,Public Equity, Corporate debt, etc.). Similar trends can be observed in broader databases such asThomson Reuters (PwC Moneytree, 2014, 2015)
-  Basel III is a comprehensive set of reform measures to strengthen the regulation, supervision andrisk management of banks. It includes several pillars which increase capital & liquidityrequirements and demand more risk discipline (Bank for International Settlements, 2010).
-  The Solvency I and II directives represent regulations covering the amount of equity capital thatinsurance companies are required to hold in order to reduce the risk of insolvency. Depending onthe categorization in the Solvency risk model, investments by insurance companies are required tobe backed with more or less equity capital (European Commission, 2014).
-  The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed in July 2010, is amajor financial reform to promote the financial stability of the United States by improvingaccountability and transparency in the financial system. The Act established new governmentagencies and introduced several measures to increase stability and oversight (111th Congress ofthe United States of America, 2010).
-  The initial version of the Volcker Rule of the Dodd Frank Act prohibited banks to engage inproprietary trading and to invest in alternative asset classes such as hedge funds and private equityfunds. In the final version, the ban to invest in hedge funds and private equity funds wasabandoned whereas the ban on proprietary trading was implemented (111th Congress of theUnited States of America, 2010).