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Finance mismatch
“Finance mismatch” occurs when the supply of finance does not meet demand. One of the main reasons for this capital market imperfection is information asymmetries between lenders/investors and borrowers which lead to adverse selection and moral hazard. Finance mismatch may particularly affect innovative projects because the outcome of an innovation investment is generally more uncertain than the outcomes of other kinds of investments. Also, since the returns on innovation investments are not perfectly appropriable, firms may be more reluctant to disclose information on innovative projects than on other types of projects. This will render negotiations with potential funders more difficult. Public policy can reduce finance mismatch in the context of innovation by facilitating access to finance (e.g. through direct funding of firms’ R&D, debt and risk sharing schemes, and fiscal measures), but also by reducing the degree of moral hazard and asymmetric information (e.g. through regulation on information disclosure).
“Finance mismatch” occurs when the demand for finance is not met by supply or vice versa. In a context of innovation it refers to potentially profitable innovation projects that might not receive access to external sources of finance.
What is specific to innovation?
- The outcome of an innovation process is uncertain and the returns on innovation investments are not perfectly appropriable. These may jeopardize the capacity of firms to pay back lenders and increase investors’ risks.
- Assessing the risks of innovative projects might be more difficult and more costly than assessing the risks of other kinds of projects. It may require experts with specific knowledge (e.g. technical or scientific knowledge), which raises assessment costs and can contribute to increase both information asymmetry and moral hazard problems.
- Innovation investments, such as R&D investments, are often intangible and idiosyncratic. A large share of R&D spending is typically dedicated to wages and salaries of scientists and engineers. These investments do not lead to assets that can be easily sold on markets. They cannot be used as collateral. This lack of collateral further increases the difficulty of obtaining debt financing.
- Businesses may also be more reluctant to disclose information on innovative projects due to the fear of imitators. This, in turn, increases information asymmetry with lenders/investors.
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Country Reports

- Austria (Financing SMEs and Entrepreneurs 2016: An OECD Scoreboard), 2016
- Belgium (Financing SMEs and Entrepreneurs 2016: An OECD Scoreboard), 2016
- Finland (Financing SMEs and Entrepreneurs 2016: An OECD Scoreboard), 2016
- Economic stability and quality of institutions in the Netherlands (Innovation, Agricultural Productivity and Sustainability in the Netherlands), 2015
- Executive summary (Innovation, Agricultural Productivity and Sustainability in Australia), 2015
Thematic Reports

- Traditional debt finance and alternative financing instruments for SMEs (New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments), 2015
- Alternative debt as a source of finance for SMEs (New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments), 2015
- Executive summary (New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments), 2015
- Asset-based finance for SMEs (New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments), 2015
- Equity finance for SMEs (New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments), 2015
What Countries are Doing
- Actors and contribution mechanisms for financing innovation
- Metrics and evaluation for financing innovation
- Demand for financing innovation
- Internal sources for financing innovation
- External sources for financing innovation
- Market and regulatory framework for finance for innovation
- Policy intervention on financing for innovation
Other Relevant IPP Pages

- Access to finance for innovative entrepreneurship
- Actors and contribution mechanisms for financing innovation
- External sources for financing innovation
- Finance
- Financial market development
- Financial market regulation
- Financing Innovation
- Firms' access to finance for innovation
- Firms and finance for innovation
- Innovation Definitions and Fundamentals
- Innovation in Firms
- Innovative businesses
- Innovative entrepreneurs and finance for innovation
- IP and markets for finance
- Other types of finance
- Policy rationales and objectives for innovation in firms
- Policy rationales and objectives for innovative entrepreneurship
- Policy rationales and objectives on financing innovation
- Regulatory framework for innovation in firms
- Regulatory framework for innovative entrepreneurship
- The business environment for innovation