Finance and Innovation

Citation

Fletcher, M. (1998), "Finance and Innovation", International Journal of Entrepreneurial Behavior & Research, Vol. 4 No. 1, pp. 74-76. https://doi.org/10.1108/ijebr.1998.4.1.74.2

This book takes a holistic approach to the subject of finance and innovation. It is concerned with both financial and management accounting aspects of innovation, it is not predominantly concerned with the funding difficulties of raising finance for a new technology‐based venture. In fact very little attention is given to the entrepreneur and small firms.

The book aims to explain the principles of finance and innovation based on two main themes that run through the book; the importance of cash and an innovation model of the firm. The model of the firm that is presented sees the firm as a series of innovations, relying for its survival mainly on its intellectual assets; goodwill, knowledge of its customers, brands, skills and knowledge of its workforce, its systems. The limitations of the “linear model” of innovation are discussed, i.e. the conventional view of progression from basic research to production, marketing and thus economic success is viewed as a gross over simplification of reality. The nuclear industry is used as an example to illustrate how the stages in innovation become complex and iterative.

Chapter one sets the context in terms of a historical review which includes definitions and types of innovation (product/process, incremental, radial and fundamental). It considers innovation in relation to the financial aspects of business organisations’ investment practices, profitability and financial market operations. The controversy over criticisms of “short‐termism” of financial investors is questioned and the view taken that the problem is more of internal pressures within a company by managers and poor communication with investors. Mutual understanding is viewed as key if managers are to instill confidence in investors that profit retention will be used wisely.

Finance is the main emphasis of the book, with the following five of the seven chapters dealing with specific financial aspects. These chapters provide a thorough account of current financial principles, concepts and techniques in financial accounting, valuation of tangible and intangible assets, management accounting and budgeting. This would be of use as an overview, to any student of finance. However students and researchers coming from an innovation perspective, without prior knowledge of the financial terms and concepts would probably require supplementary reading to illustrate some of the techniques further.

Issues dealing with small firms are dealt with mainly in the chapter on the financing of innovative new businesses. Recognising that small firms have been shown as a source of a disproportionate amount of innovation, small firms issues are considered in the context of general sources of finance for small firms (banks, hire purchase, leasing, business angels, venture capital, venture trusts, the stock market, AIM). The “Macmillan gap” and the case for soft money is put and various specific support schemes are described.

Although the book deals mainly with the innovation of large firms, it argues that to survive, large companies must incorporate the necessity for innovation into their corporate consciousness. The use of the cumulative cash flow curve for an innovation as a tool for management of individual project is illustrated. Case studies are used to show its use in the strategic management of mature businesses.

Chapter seven deals with government policy and innovation. It provides a useful review of the development of surveys of innovation activity. These were initially confined to research and development surveys first published from 1947, (e.g. CBI and Institute of Director surveys, the R and D Scoreboard, Directors, the government expenditure Annual Review and Look Forward), progressing to the measurement of innovation and the development of the OECD innovation survey guidelines in 1992. The Schumpeter (1911) classification of invention, innovation and diffusion as the one of the foundations of economics of innovation is discussed in relation to the emergence in economic studies of the importance of the individual company over the actions of government. The complexities and perils of government support of innovation in terms of direct support (grants) and indirect support (tax concessions) are explored.

The book concludes with accounting and reporting issues and the development within the UK accounting bodies about the treatment of intangible assets and goodwill in company accounts. It advocates the development of the reporting of innovation activity as a way forward in its full integration into company activity.

The book provides a useful and comprehensive overview of finance and innovation. Much of the author’s practical experience in this area over the last twenty or more years or more, is captured and backed by academic literature.