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Encyclopedia of Technology and Innovation Management by Gina Colarelli O'Connor, V. K. Narayanan

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Chapter 9. Technology and Innovation Management: Financing Technology

Patricia Robak

Drexel University

Introduction

Innovation is the key element to economic progress. The basic foundations of economic theory lie in the ability to utilize scarce resources. Without innovation, resources are exhausted rapidly. At the corporate level, the goal of shareholder wealth maximization relies on the efficient use of resources and thereby the prosperous development of technology and innovation. Paradoxically, innovation itself necessitates a significant amount of resources. The ability to acquire capital to fund technology and innovation is the primary challenge facing innovators at both the entrepreneurial level and the corporate level. The main difficulty in obtaining capital lies in the uncertainty surrounding the value of the innovation, coupled with an inherent moral hazard and adverse selection problem. This entry will commence with the issues surrounding capital acquisition and then delineate the many alternatives available for obtaining funding.

Problems in financing innovation: adverse selection and moral hazard

The main issues inherent in funding technology are the asymmetry of information between financier and technology project manager and the high degree of uncertainty and risk surrounding technology development. This explicates the classic moral hazard and adverse selection problems.

Moral hazard suggests that a technology developer who must procure funds to support the development ...

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