Conclusions and policy implications

In this paper we studied the interdependencies between the financial sector and innovations in the clean technology sector, an industry highly influenced through regulation. We add institutional investors as important actors shaping the conditions for innovation by investing into VC/PE firms active in specific sub-sectors. Consequently, policy measures aiming at these institutional investors also affect innovation activities through an indirect effect from institutional investors over VC/PE firms towards innovating (small) companies. Investigating these hitherto understudied relationships between the financial system, namely institutional investors in the US and Germany, such as pension funds, and innovators and VCs as well as policy makers enabled us to identify unintended consequences at the intersection between financial sector and innovating firms. Hence policy makers are advised to look at this process from two perspectives: innovation policy and financial policy. The joint consideration allows them to differentiate their policy measures according to the state of the (institutional) investor market in corresponding regions. Anticipating indirect consequences through an advanced understanding of these mechanisms in the equity markets to mobilize private finance is warranted.

As every study, ours is not without shortcomings. Despite all efforts to secure theoretical saturation and holistic consideration in the qualitative data collection, we focused on perceptions of market actors rather than investment flows. Given the qualitative nature of this study, one limitation is based on the context-specific results. These include the sample of only two regions and a fraction of the CT universe. However keeping generalizability in mind during all steps of the research process, our sampling approach warrants a contribution for regulated environments and with comparatively high capital requirements such as nanotech or biotech. The comparative approach with the US and Germany in the CT field covers a broad range of the market, still other countries, especially China would be interesting to compare. We suggest further research on the complex interactions and interdependencies of the financial markets and policies complementing our qualitative analysis of perceptions with quantitative data and methods (i.e. investment flows) which could add to our understanding of interdependencies between financial and innovation policy, industry emergence and financial markets (cf. Schock, Mutl, Taube, & von Flotow, 2014).

Our research has implications for policy makers striving to effectively and efficiently foster (cleantech) industry emergence by private finance. We highlight possible conflicting objectives regarding underlying concepts such as the amount of risk taken by different actors involved in financing cleantech innovation. This requires a deep understanding of both the national characteristics and agents of the financial markets as well as their impact on firms operating in this (highly regulated) environment.

To put this statement into context, if the primary goal of policy makers is to stabilize the financial market by decreasing the risk exposure of its constituents, secondary economic-political targets are affected by this decision. In a recessionary environment, secondary targets could be vital to stimulating economic growth, accelerating innovation in certain industries or, in the case of Germany, manage the transition to an alternative energy system. Relating to these secondary goals, enterprises backed by PE firms have been found to generate relatively faster growth, while enterprises backed by VC firms have been found to be relatively more innovative than their peers. Despite these positive economic effects, both PE and VC, are deemed risky asset classes and therefore are directly impacted by policies targeted at institutional investors to limit risk in their portfolios.

In case governments view green growth as a priority, they need to address market and system failures, as well as consequences stemming from the interplay of financial and innovation policy. From our qualitative study, we can infer that isolated policy measures might not be conducive to green growth. In fact, our model shows that policy makers should try to anticipate consequences in equity markets and develop a clear and transparent strategy for the Cleantech sectors and sub-sectors which integrates financial institutions as distinct actors.

Given the different (national) institutional settings of the financial sector it is advisable to keep regulation adjusted to the characteristics and maturity of firms, industries, technologies and markets. Hence a general support of competition and new entry in order to mobilize the private finance for innovation and entrepreneurship (such as syndication, networking etc. (Lerner & Tag, 2013a)) financial and innovation policy measures aimed at easing the early and growth stage private financing environment for clean technologies should be amended. For instance incentivizing market growth and stimulating competition or establishing new structures for public private cooperation, such as fund-of-fund concepts or public-private partnership funds aligned for national conditions (cf. Grilli & Murtinu, 2014).


The authors are grateful for the time and support of the interviewees. The paper benefited from feedback from Martin Kenney, John Zysman, Sanjay Jain, Brett Gilbert and other participants at the CFI-workshop at the Berkeley Roundtable on the International Economy (BRIE) in May 2012, the Babson College Entrepreneurship Research Conference (BCERC) 2012 in Fort Worth, TX, the RENT 2012 conference in Lyon, France, the DRUID conference 2013 in Barcelona, Spain and Marko Hekkert and other participants at the workshop on “Institutions and Entrepreneurial Development” in Utrecht, Netherlands, in November 2014 as well as from individual feedback from Paul Nightingale, Mariana Mazzucato and Carlota Perez during Friedemann Polzin’s stay as visiting researcher at SPRU. All remaining errors are ours.

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