Editorial for the Special Issue ‘Financing of innovation for development in the Global South’

When the idea for this Special Issue first arose in 2019, the intention of the guest editors was to provide an additional discussion forum and to support research work around the specific problems of underdeveloped countries. In the long run, tackling poverty, inequality, climate change and a wide range of social problems means that the countries of the Global South need to strategically ‘steer’ the ‘direction’¹ and pace of the economic growth and structural transformation of their economies. From an evolutionary Schumpeterian perspective, there are two fundamental factors (and related policy domains) that drive change in economic structures: finance and technological innovation (Burlamaqui and Kattel 2016). Yet, the relation between finance and innovation remains an under-represented topic in the innovation literature (see Perez 2007 for an overview of this trend in innovation studies; see also O’Sullivan 2006 for an overview of research questions). This ‘vacuum’ in the literature is even greater when it comes to the challenges of the Global South and contributions on this topic from Global South scholars are equally scarce.

The concept of ‘innovation systems’ developed by C. Freeman (1995), B-A. Lundvall (2010) and R. Nelson (1993) in their individual as well as joint works allowed for the incorporation of various institutional dimensions into the conceptual framework of innovation-led economic development. However, in this newly developed systems-based approach, finance did not feature as prominently as did technological innovation, knowledge creation activities (such as R&D) or entrepreneurship dynamics (Perez 2007). The focus largely remained on the public funding of R&D and an additional line of research on venture capital emerged during 2000s. Together, these two thematic finance-related areas, along with firm-level or sector-specific studies,² comprise the dominant approach to studying the financing function in economics of innovation and innovation studies literature.

At the same time, the authors of the ‘Comprehensive Neo-Schumpeterian Manifesto’ emphasized ‘co-evolutionary relationships of the real and monetary sides’ and there is a need to ‘re-think the role of monetary policy and central banks’ in neo-Schumpeterian economics in light of development-oriented economic policy framework that the neo-Schumpeterian approach entails (Hanusch and Pyka 2007, 283–284). Further, recent studies provide empirical evidence that finance is not ‘exogenous’ to innovation, but endogenous and qualitatively different: different types of finance (for example, long- versus short-term) result in the occurrence of different types of economic activities (Mazzucato and Semieniuk 2018). In other words, the types and forms of finance available to firms, financial policies (monetary, fiscal, investment, regulatory) and institutions, as well as the political economy of finance, can be integrated into existing conceptual frameworks present in innovation studies literature. This, in turn, can foster the potential for further conceptual innovations in scholarly pursuits to better understand the institutional dynamics and evolutionary pathways of socio-economic systems from a (neo-)Schumpeterian approach.

The call for papers for this Special Issue was organized along the three axes:

1. Financing and development from a political economy perspective: financial governance, balance of payments and geopolitical context;

2. The roles of public financial institutions, such as national development banks, in financing innovation and development; and

3. Novel forms of financing innovation: micro-finance, venture capital, crowdfunding platforms and other emerging forms of financing.

The first axis welcomed papers aiming at studying various aspects of underdevelopment dynamics that are not usually included in the innovation studies literature. While rooted in the Latin American tradition of economic thought, we felt almost obliged to promote research on the external constraints faced historically, particularly by Latin American countries, and driven by both the commercial account, and the capital and financial account, of the balance of payments. Broadly speaking, this is related to the history of ideas and the way Latin American heterodox economic scholars first started to study industry and innovation. The many economic and social crises in the region throughout the 20th century were related to the balance of payments crisis. The dynamics of industry, technology and finance have been a key determinant of external constraints and, hence, have contributed to the economic and social crises in the region. As the Latin American crises of the 1980s have demonstrated, geopolitics and geoeconomics were effectively related to international political economy (Tavares 1985). This direct connection was analysed by Latin American thinkers in order to understand the effects that the fiscal and monetary policies of the ‘core’ economies have had on the Latin American ‘periphery’s’ economic history. The direct and indirect impacts that financial and technological dependencies have had on the Latin American region remain one of the key topics to study. This leads us to suggest that incorporating a research agenda informed by the above-mentioned political and economic experiences would certainly contribute to further development of the field of innovation studies.

The role of public financial institutions (such as state investment banks or national development finance institutions) should also be analysed further in the context of the financing of innovation for development. Existing literature, particularly Finance for Development studies, provides a variety of case studies that depict policy roles and financing functions that development banks fulfil in their national and regional economies (for example, Griffith-Jones and Ocampo 2018). Therefore, we welcomed papers that would further look into the roles of these public institutions. However, we intended to take one additional step and emphasize a wider set of questions that can be incorporated into the existing literature on state investment banks. For example, how public financial institutions can take on a mission-oriented approach;³ how these institutions fulfil their institutional function in the context of a National System of Innovation; and what are the links between state investment banks and national governments and policies/strategies that aim to tackle the challenges of (under)development. In other words, we welcomed contributions that could help us further ‘unpack’ the institutional and financing roles of public investment banks.

The third axis in the call for papers was related to novel forms of financing for innovation. During the last few decades, the financial sector has been largely transformed by digital technologies, as well as by new forms of financing. These evolutionary dynamics are still ongoing and led us to consider the following research questions: whether it is possible to develop a critical approach to this subject matter; how to promote and develop the venture capital industry in order to finance the indigenization of technology in the Global South; what is the role of the state in promoting venture capital and other forms of financing in the Global South; and how novel forms of financing can help and empower economic actors globally and locally. Innovation-led growth and the transformation of economic structures may often walk side by side with changes in the market structures, such as challenging leading oligopolies in the region. Given the disruptive characteristics of (some) financial innovations, we also wanted to add a more specific research question: whether novel forms of financing may help contest locked-in market trajectories and challenge long-established oligopolies.

While designing the call for papers for this Special Issue, we mostly aimed it at the wider GLOBELICS global community and especially its younger participants, although we also welcomed contributions from the entire research community. We particularly wanted to target younger researchers working on the topics of the call. We also circulated the call among researchers working in the field of innovation studies – the research network to which the guest editors belong. The whole process of evaluating the papers for this Special Issue was carried out during the COVID-19 pandemic. COVID changed the logistics of our editorial process, but also brought a lot of new research questions. After overcoming multiple challenges, we are delighted to offer six original research papers with different themes, origins and backgrounds, that do share many of the thematic concerns that we initially had and contribute to the development of the field of innovation studies.

The compilation of original research papers that comprises this Special Issue does not speak to all the questions mentioned above, but the articles do engage with many of the questions that we initially aimed to address. Andrea Laplane, in her paper titled ‘Market co-creating and shaping through investments in innovation: a comparative analysis of two public funding programmes in Brazil’ presents a multi-dimensional perspective on the two programmes led and funded by the BNDES-FINEP and the Ministry of Health in Brazil. This comparative study analyses the role of public agencies in fostering investments in innovation by taking an active leadership position and co-opting private actors, thereby bringing in transformative public-private partnerships.

A paper jointly written by Nadia Albis, Raquel Marín, Erika Sánchez, Hernando Bayona-Rodríguez and Juan Manuel García titled ‘The impact of public support for innovation on firm productivity and on private investment in R&D in manufacturing and services in Colombia’ investigates whether public support in the form of matching grants could foster innovative trajectories for firms. The research suggests that absorptive capacities may be enhanced in manufacturing and services firms through the referred policies, which could lead to better learning processes and competitive advantages.

In the paper titled ‘Venture capital industry emergence and development in India and Brazil: the role of the state and challenges for the Global South countries’, Manuel Gonzalo, Nathalia Guimarães Alves, Juan Federico, Marina Szapiro and Hugo Kantis analyse the role that the state has played in the emergence and development of the venture capital industry in India and Brazil, two of the biggest economies of the Global South. This comparative study provides a systemic and evolutionary perspective on VC policies while raising questions and discussing implications for the challenges faced by the VC industry in the Global South.

The contribution from Lauri Johannes Hooli titled ‘Private-sector innovation process in development cooperation: perspectives from Finnish technology enterprises’ investigates the role of the cooperation between private companies from developed countries, and local actors and institutions in countries of the Global South. The paper provides evidence of the detachment between the intended roles of private companies from developed countries and the actual development-related impact they have in the countries of the Global South. That is, despite some positive outcomes in terms of innovation activities and funding opportunities, they make very limited contribution to the conventional objectives of development cooperation, such as poverty alleviation and reducing inequalities.

In the paper by João Marcos Hausmann Tavares titled ‘The financing of innovation policies in Brazil between 1999 and 2016: political economy, institutions and financial cycles’ the reasons behind the rise and fall of innovation policies in Brazil are analysed. Using mixed methods, from political economy to historical and institutional analysis, the paper attempts to trace changes in the public resources deployed for innovation policies in Brazil between 1999 and 2016. In doing so, the paper develops a broader mapping of the financial relations between funding sources and financial agents in Brazil’s National System of Innovation.

Finally, the paper by Olga Mikheeva titled ‘Development banks and state-led investments: New research questions’ presents an updated research agenda for analysing state investment banks as examples of the so-called ‘state-led investment function’. This paper suggests that incorporating the concept of public financial governance into innovation studies (and particularly the National Systems of Innovation institutional framework) can help overcome the fragmentation of existing finance-related streams of research, as outlined at the beginning of this editorial. This, in turn, can help expand existing conceptual work and lead to richer case studies of state-led investments, particularly in the context of developing countries.

To conclude, there is a will to develop the existing research agenda and research practice in new directions. Innovation literature, with its evolutionary and institutionalist theoretical foundations, is very well positioned to integrate other factors of economic development – such as finance – into its domain, in order to expand and extend its conceptual framework as well as further strengthen its policy relevance. The six research papers presented in this Special Issue touch on some of these new research questions, but we by no means claim to provide a kind of a synthesis or extensive compilation of research papers on the topic of finance and innovation. Instead, we were guided by the broader aim to inspire new research questions and studies that can expand the existing research agenda related to finance, innovation and the Global South.

Notes

1 We follow Mazzucato’s emphasis on ‘directionality’ of innovation whereby economic development is characterized not only by growth, but growth also has a direction; a particular vector of structural and socio-economic change. Because innovation is a collective and cumulative social process, public policies have a vital role to play in ‘shaping’ or ‘steering’ the direction of structural socio-economic transformation. See Mazzucato and Semieniuk (2018); see also Freeman (1995)

2 See, for example, the study of Christensen (2007) of Danish firms and the panel data of financing constraints faced by these firms; also Hain and Christensen (2019). See also historical comparative studies of finance and corporate governance control in industrial organizations by Lazonick and O’Sullivan (1997a, 1997b).

3 See, for example, how the Scottish National Investment Bank adopted three core missions to drive long-term inclusive and sustainable economic growth: https://www.thebank.scot/about/our-missions