Funding for innovation in small firms: The role of government

This paper examines some of the issues facing innovative small firms. The shortage of enterprise funding for such small firms can be explained by the uncertainty associated with such ventures,uncertainty which is magnified in the case of hightechnology firms. We characterise the uncertainty as an information gap (both technological and commercial) which is exacerbated by an asymmetry of interest between the founders of a firm and private sector sources of finance. We explore the sources of this uncertainty and examine the effect that one Government scheme, the Small Firms Merit Awards for Research and Technology (SMART), has had in offsetting such problems. Some suggestions for improvements in policy in the light of the experience of SMART are put forward.