The impetus for this path-breaking collection of original scholarly studies came from an unusual source, at least as far as academic researchers are concerned. William Janeway, an experienced venture capitalist and student of the history of technology and innovation, observed the meager attention to the study of how innovation was financed. As he detailed in the foreword to the book, this led to conversations with the Social Science Research Council and the subsequent formulation of a research project. Janeway's funding allowed the top scholars included in this volume to meet in various venues to share their ideas. The book's success owes much to the appointment of Naomi Lamoreaux and Kenneth Sokoloff, prominent researchers in the economic history of technological innovation, to see the project through to completion. It was finished prior to Sokoloff's death from cancer in May 2007.

The editors' introductory chapter and an afterward bookend eleven chapters, organized historically. Lamoreaux and Sokoloff lead with a masterful synthesis of current understanding about how innovation has been financed since the start of the nineteenth century. They argue that the institutional structure of the patent system encouraged invention and innovation in the United States because it lowered the costs of patenting, thus opening up patenting to a wide array of the population. Because patents became tradable assets in new technology, this incentivized people to engage in innovation. The editors return to these themes in the afterward.

In their synthesis of the findings of the eleven studies the editors show how the financing of innovation changed. Before 1870 small capital needs allowed creative people to fund projects themselves as well as with support from relatives, friends, and acquaintances. After 1870 the growing sophistication of technology led to a shift of invention and innovation to large corporations, which often established special units such as labs to carry out projects. While this type of funding continued into the mid- to late twentieth century, the federal government had become important by mid-century. Nonetheless, patenting rates over much of the twentieth century declined from earlier years. By the late twentieth century and continuing to the present, funding of innovation shifted outside large corporations and government. Venture capital firms supply extensive funds, contributing to dispersion of invention and innovation and a concomitant rise in patenting rates. Although the book is organized historically, it divides into two parts: four case studies of firms, cities, and industries and seven studies that draw on large data sets related to finance and innovation.

The four case studies reveal how processes of financing of innovation over the past century and a quarter have much in common with contemporary mechanisms. Between 1870 and 1920, as Lamoreaux, Margaret Levenstein, and Sokoloff show, Cleveland, Ohio, generated an extraordinary number of innovative firms in sophisticated industries, including electric light and power, steel, petroleum, chemicals, automobiles, and machinery. A small number of successful firms produced financial rewards with the leading technologies of that period. Top-notch managers, scientists, engineers, and financiers of these firms became hubs of overlapping networks of innovators and financiers. Steven Klepper's study of the early automobile industry reveals an alternative path to generating financing for a rapidly growing industry. The auto sector had roots in earlier industries that made engines, machinery, and carriages. As some firms from these industries entered automobile production they provided their own initial funding. Spin-offs contributed to the rapid multiplication of automobile firms. Successful automobile entrepreneurs became venture capitalists, providing management expertise and financing.

The development of fiber optic cable by Corning Glass, as Margaret Graham demonstrates, exemplifies the risk that established firms face financing innovation. Corning possessed a culture of supporting innovation, yet the long-term financing of fiber optic innovation ultimately comprised a “bet the company” project. Steven Usselman's study of IBM during the first few decades after 1950 offers a complementary perspective on financing innovation under conditions of high risk. The company had a secure place with making mechanical calculating machines and then electronic versions. Its early computers followed a similar process, a legacy of its skills in mechanical numerical machines. Thomas Watson Jr. ultimately supported the move to integrated circuits and finally silicon circuits, and senior engineers led the effort, but IBM had to divert substantial resources and invest huge sums of new capital.

The other chapters draw on large data sets to provide broad-brush generalizations about the finance of innovation. Larry Neal and Lance Davis argue that the diversity and competitiveness of the United States' financial system around the 1890s allowed outsiders with new technology to obtain funding, thus supporting the large-scale industrial expansion of that period. The stock markets' financial support for innovation, as Mary O'Sullivan shows, has mixed results. Firms and industries that benefit from that funding do not necessarily turn in successful performance. Yet, stock investors can accurately target innovative firms, a point that Tom Nicholas shows occurred during the 1920s. Federal support for research and development following 1950 impacted innovation in computers, software, and semiconductors. The bigger impact, as Kira Fabrizio and David Mowery report, however, probably came from the large purchases of the federal government, which helped firms underwrite innovation. The remaining chapters focus on patent protection, contemporary approaches to venture capital, and the role of knowledge capital in market evaluation.

The combination of case studies and broader statistical analyses in this book demonstrate that future research on the financing of innovation will provide significant payoff in terms of understanding how industries emerge and grow; the role of networks of entrepreneurs, scientists, engineers, and financiers; and the importance of wider economic contexts in understanding how innovation is organized institutionally. Both research approaches should be continued. Case studies of individual clusters of industries, the emergence of new industries, and the rise of innovative firms generate rich understandings of how financing works to support innovation. At the same time broader statistical analyses permit the rigorous testing of hypotheses across many firms and industries. The themes that emerged covering the period from 1870 to the present reveal that the writers of these chapters have identified general principles about how innovation is financed. The editors and the chapter contributors are owed a debt of thanks for bringing these ideas into public form in a compact version.