Financial constraints to the development of innovation are often considered one of the main impediments for high-technology firms seeking to expand and grow. This paper discusses the problems experienced by small businesses in gaining access to finance. Traditional financial sources are inadequate to finance innovative projects. Firms are involved in maintaining control over their activities and are willing to issue outside equity only if the new investors also provide non-financial competencies.

The Schumpeterian theory states that because of high barriers to entry, innovative activities require considerable market power and hence take place in large firms. This view has been challenged from many angles. Innovative activities of small firms make an important contribution distinct from that of large firms and thus may respond to a different set of incentives and resources.

There are several factors, which may determine a relative advantage for small firms in order to innovate. The role of industrial structure and local environment, as well as marketing and R&D, has been widely pointed out by several studies. Empirical research shows that Small and Medium Enterprises (SMEs) are actually not deterred from entering capital-intensive industries, SMEs are found to contribute about as many innovations as large firms in manufacturing and traditional sectors. Moreover, barriers to entry can be reduced by network collaboration.

Indeed, the source of innovation is established to be different for SMEs in comparison with their larger counterparts: while private R&D expenditures contribute more to the innovative activity of large firms, the spillovers from university research as well as informal external sources of information are more important for SMEs.

Financial-constraints, innovation, high-technology, small-businesses, financeinnovativeprojects, non-financial competencies, market power, large firms,Innovative activities, industrial structure,local environment, marketing ,R&D, ,Empirical research,Small and Medium Enterprises (SMEs), capital-intensive industries, traditional sectors network collaboration.