By Sandrine Rattan

Innovation is indeed a tough concept to “buy-in” to, and understandably so. Scientific research has proven that despite the risks involved, companies seek innovation because it contributes to growth and shareholder value.

Let’s begin to look at building an innovative economy through risk financing – A million dollar equation; because both concepts connote some element of risk.

Markets by their very nature are opposed to both innovation and risk financing, because they yearn for that measure of equilibrium which is synonymous with market stability. Apart from creating market stability, equilibrium is a situation in which every player in a market believes that he or she is making the best possible choices, and that every other player is doing the same. By contrast, innovation and risk financing are likely to affect that balance. 
From a global perspective, an innovative economy, whether created through traditional or non-traditional financing i.e. risk financing, is inevitable. In the context of Trinidad and Tobago, the government’s “Vision 2020”, FTAA and CSME, when tied together, reinforces the importance of the concept of innovation.

With the advent of the “Caribbean Single Market and Economy”, it is imperative for CARICOM economies to become innovative, in order to remain competitive and market-driven.  It is a well-known fact, that there is an automatic decrease in market share of economies, which do not constantly pursue competitive intelligence.

Building an innovative economy means the creation of new business ventures both in the traditional and non-traditional sectors, and therefore, there is a need for a high level of support from both debt and private equity financiers.

Once the concept of risk financing is applied effectively within markets, economies will reap tangible rewards. Before proceeding further, some attention must be drawn to an excerpt from the “Organization for Economic Co-operation and Development (OECD), which compares innovation financing with expenses on gambling:
“In many countries, about 5% of the GNP is spent
on traditional gambling – casinos, lotteries, football
pools, horse-racing – and one must ask why is so little
spent on innovation financing (OECD 1982)”

Using this analogy, it is reasonable to deduce that the role of private equity financing becomes increasingly critical as a parallel support for traditional financing. In analyzing the link between an innovative economy and risk financing, it is necessary to consider the perspectives of both industrialized and developing economies.

Firstly, in industrialized economies, entrepreneurs create unique products, services and processes, whereas in developing economies, there may be imitation of existing products, services and processes, and therefore, in order to compete in global markets, developing economies need to understand the dynamics of a new economy, particularly as it relates to entrepreneurship and innovativeness.

It is in this context, that the pivotal role of venture capital comes to the fore, as an innovation financing instrument, that can contribute to the creation of a new wave of global industrialization.

Though it is rare to identify any single economy which became innovative solely through risk financing, its implementation is indeed feasible, and can in fact build an economy.

Within recent years, the role of venture capital has evolved, as is evident in the transformation of economies of industrialized countries, to what is referred to as the new economy. The mainstay of this economy is no longer labor and raw materials, as obtained in the old economy.

The new economy was evident in the US in the late 1990s, when there was a boom period of economic growth. It is widely accepted that this economic growth was the result of technological investments that took place in the 1980s, particularly investments in information technology.

It is noteworthy that there are several empirical studies which advocated that a strong venture capital industry leads to economic growth. For example, an analysis of 530 “venture-supported” and “non venture-supported” companies, has shown that the presence of venture activity in an industry, significantly increases the output of innovative activities.

Innovativeness and entrepreneurship will be the genesis of the new global paradigm. To start the process, developing economies need to engage in in-depth analyses of their existing technological infrastructure, so that they can identify and resolve whatever problems that hinder the national innovation system from functioning in an efficient manner.

In order for venture capital to function, developing economies need to consider all the dimensions of the innovation financing system within the context of the particular country.

Funds are an important component of an entrepreneurial culture, but once there are no technological opportunities, they will not be used efficiently, and therefore, developing economies should ensure efficient use by investing in scientific and technological developments. This process requires input and support from government, private sector and tertiary institutions.

Innovation financing is only one aspect of the overall transformation process, and even this task is not easily achievable in the short-term. However, if there is a delay in starting, the goal of having a well-functioning venture capital industry will be further delayed.