How financial systems and firm strategy impact the choice of innovation funding

Purpose: The funding of innovation is explained by typical cost-based financial approaches. This paper breaks away from such tradition, and the purpose of this paper is to propose an alternative view where innovation funding decisions are strategic and concern interactions between actors – each with their own characteristics and strategic intentions – project features, and traits of the setting in which interactions take place. Design/methodology/approach: This paper builds up an alternative framework to understand how innovation is financed by considering the interplay of innovation characteristics, the strategic reasons of project owners and funders, and the role of the matching environment and conditions. This proposal includes explanatory elements overlooked by extant theories. An illustrative case is presented to support the need for this proposal. Findings: The framework proposed proves useful to better understand innovation funding cases where the traditional financial theory does not suffice. Practical implications: Innovative companies may improve decision making about resource allocation to innovation; innovation funders may refine their decision-making criteria and implementation; and policy makers and practitioners need to devise better supporting strategies for innovative companies. Originality/value: This proposal considers a continuum of funding options where supply/demand will match on the grounds of strategic decisions made during the interaction itself, under certain contextual conditions. Hence, it enriches the understanding of strategic decisions regarding firm capital structure and investment theory when it comes to funding innovation.