Evaluating innovation investment outcomes of government venture funding: a longitudinal, multi-level, multi-source analysis of small firms in the U.S.
- Publication date
- Publisher
Abstract
The study examines the role of government venture funding in facilitating entrepreneurship
and innovation. In particular, the study integrates financial and behavioural perspectives in a unified
framework to analyse the determinants and outcomes of innovation investments designed to help
small firms commercialise their research and development activities. On the one hand, it draws upon
real options reasoning theory to understand the effects of various resource allocation strategies on
investment yield and firm performance. On the other hand, it uses signalling theory and the attention-
based view to examine which individual-, project- and firm-level characteristics affect early- and late-
stage funding allocation decisions, and whether these signals are also accurate predictors of
investment yield and firm performance.
To investigate government investment patterns, 367 projects from 275 firms that participated
in the Small Business Innovation Research (SBIR) programme administered by the National Health
Institute in the U.S. were analysed over a seven-year period from 2006 to 2012 using a combination
of statistical and econometric techniques.
First, the study finds that the formal real options reasoning (ROR) structure evident in the
composition and execution of the government venture funding programme is only intuitively
underpinned by the real options logic of decision-making. The results reveal that high initial funding
commitment and continuation of government venture funding have a diminishing effect on return on
investment, whereas consistent matching of funding decisions in line with ROR allows to extract value
from staged investments. Second, drawing on signalling theory and attention-based view helps
uncover discrepancies between prescribed and actual investment behaviour. Third, to benefit from
options-like investments, firms require different combinations of skills and capabilities depending on
their experience and the target performance outcome.
In sum, the study adds to the empirical body of literature analysing the tension between
economic logic of efficient resource allocation and behavioural and cognitive effects on rational sense-
making. The analysis delineates boundary conditions of real options reasoning in the context of
government venture funding, which provides important implications for strategic management theory
and research policy