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A Study on Investing and Financing System for Supporting Science And Technology Innovation

Author: GongChuanZhou
Tutor: HongYinXing
School: Nanjing University
Course: Theoretical Economics
Keywords: science and technology innovation uncertainty investing and financing risk-return risk-sharing
CLC: G322
Type: PhD thesis
Year: 2012
Downloads: 136
Quote: 0
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Science and technology innovation is the commercialization of science and technology, and centers on the application of science and technology in industries to acquire economic and social benefits. In our knowledge-based economy age, scientific knowledge and findings are inclined to the direct combination of economy, infiltrate technology each other and merge together day by day, and the scientific research is the focus point in the competition of science and technology. The science and technology innovation is the first driving power of accelerating the development of economy, and becomes the topic subject of our age. Faced with the wave of science and technology innovation around the world, China first set the strategy of "developing the country by relying on science and education" in1995. In2006, China formally put forward the development strategy of "strengthening autonomous innovation ability and building innovative country". In2011, China forward pointed out that "encouraging the integration of finance and science&technology should be Chinese strategic election in order to promote autonomous innovation ability and build innovative country". It is obvious that one of the important theoretical and practical problems faced with China is to discover the inherent law by exploring the process of innovation, and try to solve the difficult problem of encouraging financing supports for investing in innovation projects.The whole process of science and technology innovation contains the period of knowledge innovation, the period of technology innovation, and the period of innovation diffusion. The knowledge innovation focuses on the production, spread and application of knowledge, and thus supplies us with new theories and methods for knowing and changing the world. The technology innovation stresses the practical use of scientific and technological achievements in order to convert the potential power into the real productive force. The diffusion of innovation emphasizes the technological advance and upgrade in industries to boost the forming and expanding of new high-tech industries. Science and technology innovation is a complicated dynamic system, and is propelled by combining the pushing power form the development of science and technology and the pulling force from market demands. It takes on a history of evolution. The key segment of the innovation is the connection of knowledge innovation and technology innovation, and the enterprise need not only adopt new technologies, but also strengthen the joint researches with universities and research institutes. In other words, the enterprise should be the primary investors in incubating new and high technologies. A risk-return analysis of the innovation process denotes that the risk and return don’t match with each other all the time and enterprise must get huge amounts of financial supports from the society when investing in innovation projects. However, social financial supports are hardly available because of the risks such as technology risk, market risk and management risk faced by innovation projects. This means the financing risk is very high, and therefore the return from the investment in innovation project is largely uncertain. Actually, the key point in solving the problem shows that we should build a mechanism of risk-sharing and return-sharing according to the requirements of the law risk-return, which means that the social organizations and persons can disperse and reduce innovators’ investing and financing risks, and improve the success rate of innovation through the way of money input.The innovators’ tolerance of risks is finite and limited. If the society share the risks with them, they can improve their bearability of risks, undertake technology projects which they are unable to, and invest more technology projects. There is no doubt that the society can improve innovation ability by sharing risks. Therefore, we should construct a social investing and financing system for supporting science and technology innovation, and try to form an integrative operational mechanism of "government, enterprise, university, research institute, and finance system". Among them, the government mainly takes the huge risks in the period of knowledge innovation. The fiscal expenditure on science and technology includes the direct fiscal support such as fiscal appropriation for science and technology and indirect fiscal support such as tax preference and government procurement, and can help cutting the investing cost of innovation projects. By gradually reducing the risks, the government may finally utilize market mechanism to lead and encourage more social investments in technological projects. Financial system possesses the function of allocating risks, and can satisfy different demands of liquidity and rate of return from different investors when they invest in innovation projects. A financial organization such as banks is able to make gains from managing risks, and therefore bears the function of intertemporal smoothing risk sharing. Banks can not only supply innovators with relationship lending, intellectual property mortgage lending, policy-based lending and financing lease, but also help innovators to improve their management of innovation by means of credit claim corporate governance mechanism, which is conducive to increasing the success rate of innovation. Capital market has the advantage of information revealing and quantitative assessing, and can supply different investment instruments. It bears the function of cross-sectional risk sharing, and the share ownership governance mechanism may propel and discipline the scientific staff and governors in a way of human capital. The innovators may go to stock market, bond market and venture capital market to raise money, and to disperse risks according to their different financing demands.We make an inspection on Chinese investing and financing system for supporting innovation. On the one hand, we affirm the policies and measures for promoting and sustaining innovation by summing up historical experience. On the other hand, we point out the existing problems by analyzing the present innovation situation. By building an econometric model, we make an analysis of Chinese investing and financing system for supporting science and technology innovation. The outcomes of the model show that innovation demands a long and persistent input of money, and medium and long term loans and fiscal appropriation for science and technology both play important roles, while securities market makes a little contribution to innovation. The present money supply of innovation relies largely on credit funds from banks, so new forms of credit loans for science and technology projects are practically important. Chinese securities market doesn’t provide enough investment instruments to disperse the high risks in innovation projects and still has a long way to go. On the basis of former analyses, we make following suggestions. Firstly, China should strengthen government function of leading and programming science and technology innovation, and construct an environment of law and institution for inspiring innovation. Secondly, China should increase fiscal expenditure on science and technology, optimize the structure of fiscal expenditure on science and technology, and modify and implement fiscal policies and measures for promoting innovation. Thirdly, China should advance the interest rate marketization reform step by step, seek new forms of financial services from banks, and accelerate the development of medium and small financial institutions. Lastly, China should vigorously build the over-the-counter market, explore new ways of financing forms from bond market, and energetically back the innovation in venture capital market.

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