General
02 Feb 2012

Economists call for radical and immediate reform of financial system

• New research uncovers key policy recommendations for financial reform to exit the crisis
• MPs told “Focus must be on finance for innovation, not innovation for finance”

London, 2nd February 2012 – The financial crisis has exposed a dysfunctional financial system that threatens European and global economic stability with potentially major social consequences. That’s according to a new report released today by Finance, Innovation and Growth (FINNOV – www.finnov-fp7.eu), a three-year research project funded by the European Commission.*

FINNOV explored the link between the financial sector and real economy, analysing to what extent financial activities promote or impede industrial growth and innovation. The research found immediate financial reform is essential to end the crisis and drive economic growth, leading to a number of challenging policy recommendations, including:

• Venture capital is most effective when preceded by strategic investments by the state in early stage innovation;
• Successful state investments in innovation should deliver tangible returns to the public purse, not just debt;
• Blanket support for SMEs is misguided and should be better targeted to producing not more firms but better firms that create more jobs and better products;
• Share buy-backs should be subject to stronger governance control or banned outright;
• Indicators of performance, used by financial markets, should be rebalanced to reflect companies’ investments in innovation, R&D and productivity;

FINNOV is an influential collaboration of Economics experts from seven top European Institutions, led by the Open University and its work has recently been cited in the Department of Business, Innovation and Skills (BIS) Growth Strategy Paper. FINNOV concluded its activities yesterday in the House of Commons by presenting its policy recommendations to MPs including Rt Hon David Willetts, Secretary of State for Universities and Science and Ms Chi Onwurah, Shadow Minster for Innovation and Science.

Professor Mariana Mazzucato, FINNOV project lead and Professor in Science and Technology at the University of Sussex (Visiting Professor at the Open University) is an expert on the economics of growth and innovation. She said of the findings: “The crisis has exposed deep flaws in conventional economic thinking on which financial policies and regulations have been based. The changing links between risks and rewards have contributed to an increasing ‘financialization’ of the economy, and this has allowed parts of the financial services sector to extract value at the expense of industrial growth. This practice is undermining investment in productive activity and has already destabilised the economy. Innovation requires “patient capital” with greater distribution of rewards to contributors to the innovation process, aligned to the money, time and energy they risk making it a success.”

Rt Hon David Willetts MP, Minister for Universities and Science said: “How the financial system supports investment is a key question for policy makers at the present time and a key concern of BIS. We welcome the contribution FINNOV is making to the discussion and debate.”

Ms Chi Onwurah MP, Shadow Minister for Innovation and Science commented: “The relationship between innovation, finance and public policy is one of the key questions of our time. Governments who get that relationship right can use it to build a sustainable economy. Governments who get it wrong will pay a high price.”

The research has identified trends and practices within financial markets that are damaging the UK’s growth prospects. Out of this a comprehensive set of policy recommendations has been developed

FOR FULL RELEASE, INCLUDING THE RECOMMENDATIONS CONTACT THE PRESS OFFICE FOR A PDF VERSION OF THE RELEASE

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