In the conceptual dimension, this study is framed on the merger of two streams of the literature: Theory of innovation (in this financial innovation) and theory of corporate finance. Within the first stream, the paper focuses on the definitions, types, and functions of financial innovations analyzed from the financial system perspective. In the second stream, the paper addresses the potential application of financial innovation in financial management concerning the motives and consequences of their effective implementation. The discussion about the barriers to financial innovation application in corporate financial management is the issue that links both theories.
2.1. Financial Innovation as a Special Type of Innovation
Innovation is a very broad concept, widely investigated both in the theoretical and empirical studies. In the 1930s, J. Schumpeter defined innovation as the introduction of new or qualitative change in existing products, processes, markets, sources of supply, and organizations. Innovation encompasses a creative activity, the element of novelty, as well as disruptive change, and is often described as a complex, multi-actor process, determined by many, various factors (Assink 2006
; Boer and During 2001
; Mikl-Horke 2004
). Baregheh et al.
) analyzed the definitions of innovations from the different disciplines and identified key attributes of innovations: (1) Nature of innovation (new, improve, change); (2) type of innovation (product, service, process, technological, financial); (3) stages of innovation (creation, generation, implementation, development, adoption/diffusion); (4) social context (organizations, firms, customers, social systems, employees, developers/creators, end-users); (5) means of innovation (technology, ideas, inventions, creativity, market); and (6) aim of innovation (succeed, differentiate, compete, create value).
The sources of innovations can be analyzed from various perspectives. According to the demand theory, innovations are created as a response to the demand of firms that want to acquire a competitive advantage in their business environment (the demand-driven or market pull innovations described by Drucker 2002
). However, this demand can be influenced either by the internal needs of the firm aiming to improve its activity or by the changes in its environment requiring the proper adjustment in its business strategy.
The second approach stresses the role of the supply-side factors, as innovations are first created by the innovation providers (creators), and then they are applied by their end-users (households and firms). The supply-driven innovations (linked to technology-push hypothesis) result from the process consisting of three phases: (1) The creativity phase (invention), (2) the innovation phase, and (3) the diffusion phase (realized either by imitation or by commercialization) (Dabic et al. 2011
). However, Di Stefano et al.
) described how firms may match technology with demand and capitalize on technology and demand as sources of innovation.
The latest approach refers to the category of open innovation, in which firms use inflows of knowledge to accelerate internal innovation and outflows of knowledge to expand the markets for external use of innovation (Chesbrough 2006
). Chesbrough and Bogers
) redefine open innovation as ‘a distributed innovation process based on purposively managed knowledge flows across organizational boundaries.’ The open innovation is linked to various related innovation phenomena, such as users as innovators (Bogers et al. 2010
; Piller and West 2014
), innovation communities (Dahlander et al. 2008
), and open knowledge or open-source software development (von Krogh et al. 2012
Innovations, regardless of their nature, are the driving force of the economy, a source of competitive advantage, and a chance to improve social welfare. Financial innovations, which occur in the financial system, play a particular role in this context. According to the dynamic and evolutionary approach to finance, the ability of the financial system to create innovations leads to transformations in the socio-economic system and the political and legal system (Evstigneev et al. 2004
; Nesvetailova 2014
Financial innovations are not a new issue, as they have been accompanying technological innovations from the very beginning (Michalopoulos et al. 2009
). It is indisputable that financial and technical innovations are bound together, and they evolve together over time. Financial innovations provide a mechanism to finance innovative technological projects, while technological progress creates a basis for new financial solutions. The latest financial innovations are created through the development of the Fintech and blockchain technology, in particular (Chen et al. 2019
; Nicoletti 2017
; Tapscott and Tapscott 2017
; Zheng et al. 2018
). As Laeven et al.
) stated, financial innovations are essential for technological innovations and economic growth. This observation underlines the importance of financial innovations for the individual entities, as well as for the entire society as suggested by (Allen 2012
; Lerner and Tufano 2011
; Michalopoulos et al. 2009
). The detailed comparison of technological and financial innovations is presented in (Kapoor and Mention 2015
; Pyka 2013
; Stradomski 2006
The definition of financial innovations can be analyzed in a broad or narrow meaning. In most of the studies, the financial innovations are presented in a narrow meaning, as mainly the new developments in financial instruments (product innovations) are described (compare: Anderloni and Bongini 2009
; Frame and White 2014
; Pyka 2013
). The product financial innovations can be in a form of entirely new instruments, a combination, or a modification of traditional instruments or new applications of these instruments. Llewellyn
) categorized financial innovations as: (1) Product innovations; (2) process innovations, and (3) risk-shifting innovations, taking into account the form of financial innovations and their function.
However, taking into account the main aim of this study, in order to show the variety of financial innovations, the broad definition is applied following Lerner and Tufano
), and Miller
). According to this approach, financial innovations are described as a process of change resulting in the new concepts, solutions, and developments in all elements of the financial system: Financial markets, institutions, instruments, and regulations. Consequently, financial innovations constitute a huge and variable group of new developments that are created and implemented to increase the efficiency of the financial system in general, and by this, to enhance the economic growth and social welfare. The relationship between these groups of financial innovations is multidimensional and can be described as ‘the spiral of innovations,’ whereby one innovation begets the next, as suggested by Miller
) and further developed by Persons and Warther
) and Lerner and Tufano
The process of creating financial innovations usually includes several stages: (1) Source of innovation—initializing factor, (2) idea—response to the factor, (3) invention—creating innovation, (4) implementation—applying innovation, (5) effect of innovation—assessing the results of the application, (6) withdrawal of unsuccessful innovations or modification—improvement of successful innovations, (7) diffusion by imitation or commercialization. Due to the low level of patent protection and advanced techniques of communication, the diffusion of financial innovations is very fast (Kapoor and Mention 2015
; Lerner et al. 2020
). Thus, successful innovations can be spread around the global financial system very quickly. It is worth stressing that most of the financial innovations are evolutionary adaptations of prior developments. Therefore, the financial system has many incremental innovations rather than radical ones.
The demand-side and the supply-side theories of financial innovations explain the motives of creation, implementation, and diffusion of new financial developments (Awery 2013
). The demand-side theory indicates that the main reasons for financial innovations are the imperfections of the financial system, mainly the asymmetric information, agency costs, transaction costs, market risk, and taxes (Fabozzi et al. 2003
; Tufano 2003
). It is often stressed that, if the financial markets were perfect and complete, there would be no opportunities for financial innovations. Silber
) also states that financial innovations are created to lessen the financial constraints (both internal and external) imposed on firms. According to the demand-side theory, financial innovations should be created as a response to the financial system participants’ needs aiming to meet their individual goals and requirements (the demand-driven financial innovations).
Simultaneously, since the beginning of the 1980s, the intense activity of the financial institutions creating new financial developments has been observed, being the subject of the analysis of the supply-side theory. Financial innovations are created by financial institutions to increase their competitive advantage, to improve their performance, or to protect their market situation. A large number of financial innovations are offered to the clients in various fields of the financial activity: New forms of investment, savings and financing products, payment instruments and mechanisms (the supply-driven financial innovations). The most important exogenous factors influencing the increased activity of the financial institutions in creating and implementing financial innovations include globalization and disintermediation (leading to the development of Alternative Finance), increased volatility of the financial market, deregulation, and liberalization of the capital flows and the dynamic development of the communication technologies, in this dynamic growth of the FinTech sector (Chen et al. 2019
; Nicoletti 2017
). Endogenous factors that have an impact on the potential of the financial institutions to create new solutions include intense competition among financial institutions (traditional ones and others), short-term perspective on the financial results, searching for new sources of revenues (other than interest revenues), and the increasing importance of the risk management process (Anderloni and Bongini 2009
; Fabozzi et al. 2003
; Llewellyn 2009
A huge variety of new financial developments resulted in a diversified classification concerning sources, factors, motives, types, forms, and effects of financial innovations (Błach 2011
; Miller 1986
; Llewellyn 2009
; Lumpkin 2010
; Nesvetailova 2014
). By focusing only on the functional approach, financial innovations are categorized regarding their purpose: (1) Price-risk transferring, (2) credit-risk transferring, (3) liquidity-generating, (4) credit-generating, and (5) equity-generating instruments (Fabozzi et al. 2003
). However, taking into account the assumptions that financial innovations should enhance the efficiency of the financial system in fulfilling its core functions, the functions of the financial innovations can be classified in the same way as the functions of the financial system. According to this proposition, the functions of the financial innovations can be described as follows: (1) Payment function (increasing the liquidity of the financial system), (2) investment function (increasing the variety of investment opportunities better-adjusted to the risk-return profile of the investor), (3) financing function (improving access to the sources of funds), (4) pricing function (improving the process of assets valuation and risk), and (5) risk management function (increasing the possibilities of transferring risk) (Błach 2011
However, the impact of financial innovations should be analyzed with caution. In times of global financial crisis, financial innovations were criticized for their role in it, regarded as a source of confusion and a way to enhance investors to take on more risk than they realized (Henderson and Pearson 2009
; Jenkinson et al. 2008
; Redmond 2013
). One of the consequences of the financial crisis is limited trust in financial innovations. However, recently, there have been presented opinions that financial innovations are neither good nor bad in general, but they contain a mixture of elements and their consequences depend on the way they are applied (Allen 2012
). What is more, Shiller
) underlined that financial innovations are required to achieve society’s goals and Beck et al.
) found that the net effect of financial innovation on economic growth is positive.
Thus, the sustainable (true) financial innovations (applied correctly) are expected to bring benefits in reducing the imperfections of the financial system by decreasing the level of risk, closing the information gap, lowering the transaction cost, and minimizing the tax payments. Simultaneously, they are expected to enhance the positive aspects of the financial system by maintaining its stability, increasing its efficiency in performing its core functions, and providing services and instruments better-adjusted to the system participants’ needs and goals. Meanwhile, the harmful financial innovations (applied in the wrong way) may damage the financial system and the entire economy, so they should be avoided. In this study, a positive approach to financial innovation is applied focusing on the potential positive consequences of their application from the corporate financial strategy perspective.
2.2. Application of Financial Innovations in the Corporate Financial Strategy
Financial innovations may be applied by various end-users: Households, small firms, and large corporations, governments, and financial institutions. This paper focuses on the decisions of nonfinancial firms (operating in various sectors: Production, construction, trade, and service) concerning the application of financial innovations. This issue leads to the second part of the conceptual framework related to corporate financial management. Nowadays, smaller and larger firms face many challenges that force them to be innovative, using both technological and financial innovations. The decision of the firm to use financial innovations can be determined by the internal or/and external factors. Internal factors (endogenous determinants) are connected with (1) the firm’s characteristics (e.g., size, age, legal form, ownership structure, operating and financial risk, financial performance, capital structure and dividend policy, and attitude toward risk and innovations), (2) its development strategy (related to the available resources and stage of life cycle), (3) defined objectives (financial and nonfinancial goals formulated to meet the expectations of various stakeholders), and (4) various needs (e.g., investment projects, process of endogenous or exogenous growth), while external factors (exogenous determinants) arise from the firm’s business environment and changes in the market conditions (e.g., general macroeconomic situation, development of financial market, activity of the financial institutions in creating innovations, tax and accounting regulations, volatility of the market parameters). The impact of the business environment on the firm’s decisions, goals, and strategy is evident. Although the internal factors are very important, as they are mainly determined by the changes in the business conditions, it can be assumed that the major impulses to implement financial innovations in corporate financial management come from its environment. Thus, the application of financial innovations in the corporate financial strategy is not necessarily connected with the firm’s individual needs and objectives (based on the rational analysis of the costs and benefits related to particular financial innovation application), but it can be dictated by the actions explained by the herd behavior. This behavioral approach to financial innovation is used in the studies by: Lievens et al.
) and Redmond
Regarding the corporate financial strategy perspective, functions of the financial innovations can be analyzed in four basic dimensions connected with: (1) Financing decisions, (2) investment, (3) risk management, and (4) working capital management decisions. Financial innovations within the financing decisions aim to improve access to various sources of funds, decreasing the cost of capital, and increasing the flexibility of the capital structure (e.g., innovations in equity and debt securities, hybrid securities and structured instruments, crowdfunding and private equity financing). Thus, their role is crucial for the realization of the business strategy and the firm’s development. Financial innovations applied to improve access to corporate funds are presented in numerous papers (e.g., Ahlers et al. 2015
; Allen and Yago 2010
; Coval et al. 2009
; Culp 2002
; Lebelle et al. 2020
; Sieradzka 2020
; Tang and Zhang 2020
; Węcławski 2017
Financial innovations within the investment decisions are applied to ensure the rate of return on investment projects, to decrease the investment risk and transaction costs, or to improve the access to various investment opportunities. Firms may use various innovations in investment opportunities available in the market, also for other types of investors, such as: Alternative investment funds, structured products, derivatives, innovations in equities and fixed-income securities. New investment opportunities are discussed in many papers, e.g., Amenc et al.
), Eichholtz and Yönder
), Moskal and Zawadzka
), and Poterba and Shoven
Financial innovation within the risk management decisions may be implemented to stabilize firm cash flows, reduce the market risk, increase efficiency, and reduce the costs of the risk management process (e.g., various classes of derivatives and innovations in insurance products). They also offer the possibility to combine risk management with financing or investment decisions (e.g., structured securities: Equity-linked, interest rate-linked, exchange rate-linked, or commodity-linked structured bonds). They result from the convergence of the capital and insurance market (e.g., contingent capital solutions, insurance-linked securities, weather derivatives). These innovations are analyzed in the studies by: Bolton and Samama
), Bouriaux and MacMinn
), Cummins et al.
), and Wieczorek-Kosmala
Within working capital management, financial innovations may be introduced to improve financial liquidity, reduce transaction costs, or accelerate the cash conversion cycle (e.g., mobile banking platform, contactless payment instruments, cryptocurrencies, innovations in treasury management, new mechanisms of supply chain financing, developments in cash pooling and factoring). Particular types of financial innovations improving working capital management are presented in (Gupta 2013
; Mucelli et al. 2020
; Polasik and Fiszeder 2010
; Tsai and Peng 2017
Thus, financial innovations can be implemented in the corporate financial strategy due to many reasons that are related to the specificity and purpose of financial management. Overall, financial innovations may improve the firm’s ability to use opportunities and to protect against threats more effectively. Sustainable financial innovations are expected to enhance financial management and increase the ability of the firm to create value. This is consistent with the normative approach related to neoclassical finance, according to which financial innovations should be implemented only if the benefits are higher than the costs related to their implementation. This approach is based on the Rational-Efficiency Hypothesis, which states that financial innovations are created and implemented to generate profit for their users. A normative approach is applied in this study, following (e.g., Frame and White 2014
; Molyneux and Shamroukh 1999
; Tufano 2003
; Lerner 2006
; Rossignoli and Arnaboldi 2009
). Thus, the proper application of financial innovation may increase revenues (financial revenues) and reduce costs (financial costs, cost of capital), improving the ability of the company to create profit and value (which may be identified through the economic value-added perspective). The theoretical framework illustrating the application of financial innovations in the corporate financial strategy is presented in Figure 1
2.3. Barriers to Financial Innovations Implementation in the Corporate Financial Strategy
However, the correct application of financial innovations may be hampered due to various obstacles. This leads to another issue—barriers to innovations, which may be analyzed concerning: (1) The stages of the innovation process (knowledge, invention, implementation, diffusion, and adaptation), (2) the levels of innovation (microeconomic and macroeconomic barriers), and (3) the nature of factors (financial, personal and organizational, socio-cultural and legal factors). The variety of barriers to innovation has been recently discussed in (Assink 2006
; Hueske and Guenther 2015
; Madeira et al. 2017
). Although these studies discuss barriers to technological innovations, their findings may be applied to financial innovations. Besides, it should be noted that the issue of barriers to financial innovations (in the general context) is rarely discussed in the literature.
From the macroeconomic perspective, the process of creation and diffusion of financial innovation may be hindered by various types of barriers that fall into four broad categories: (1) Bureaucratic barriers (including legal barriers), (2) economic barriers (including financial and market barriers), (3) technical barriers, and (4) psycho-social barriers (related to end users and their attitude toward innovation), as noted by Rogers
) and Spence
). Identifying barriers and subsequently taking action to eliminate them should enhance the diffusion of financial innovation. However, it should be stressed that despite taking such steps, the innovation process may fail. The diffusion of financial innovation in the socio-economic system also requires appropriate law regulations and collective acceptance in society. Meeting these conditions is necessary to increase the scale of financial innovation in the economy.
From the microeconomic perspective, barriers to the creation and diffusion of financial innovation may be analyzed based on the OECD methodology, which distinguishes between the following groups of factors (Marcinkowska 2012
financial barriers (e.g., high costs of innovative activity, lack of sources of financing, transaction costs and fees),
knowledge barriers (e.g., lack of knowledge on financial innovation, lack of qualified employees),
market barriers (e.g., lack of information on the market offer of financial innovation, lack of matching offer),
institutional regulations (e.g., tax and accounting regulations),
psychological factors (e.g., lack of need to create innovations, negative attitude toward innovative processes).
From the end-user perspective, it has to be stressed that some factors are beyond the control of an individual firm—these are institutional and market factors, that form exogenous barriers. Financial factors, psychological factors, and those related to knowledge (forming endogenous barriers) may be reduced to some extent by, e.g., changes in the organizational structure, introduction of new technology, or employee training and development (Drew 1995
; Vermeulen 2004
). In the context of the application of financial innovations, the barriers related to knowledge and financial literacy are of the highest importance and they are widely discussed among others in (Frączek and Klimontowicz 2015
; Gustman et al. 2012
; Kieżel and Smyczek 2015
; Shiller 2013
) or (Świecka et al. 2020
Thus, the identification and prioritization of the main barriers to financial innovations may help to develop the mechanisms (at the institutional and individual level) aiming at their reduction, and consequently improving the efficiency and effectiveness of financial innovation application in the corporate financial strategy. As it was already mentioned, studies on financial innovation application in firms, as well as studies on the barriers to financial innovations implementations in firms, are relatively rare. Thus, this paper aims to cover this gap.