Innovation and research can encourage economic and social development. The government can increase innovation by directly investing in research. However, public expenditure may be sub-optimal due to a lack of resources and the latent inefficiencies of a government bureaucracy. An alternative way to stimulate innovation is to provide grants and subsidies to private organisations that undertake research, and to venture funds that might invest in that research. Such schemes have existed in Australia, and to a lesser extent in the United Kingdom, the United States and parts of Europe. The utility of these grants and subsidies is the focus of this article.
Venture capital (VC) is an important driver of innovation. Venture capital funding has stimulated economic growth in the United States. It is also an important determinant of start-up financing and a catalyst for improving corporate governance. However, these benefits rely on there being a strong domestic VC sector, with foreign funds being less able to nurture start-ups due to problems of geographical distance and informational symmetry. This poses a problem in smaller markets, such as Australia, where there is a lack of trained venture capitalists (VCs) and the small market might make it prohibitively risky and costly for professionals to start a VC fund. Some governments have attempted to resolve this by either establishing their own venture funds or backing existing VC funds.