What ways do firms have to finance R&D activities? What is the cost of these forms of funding?

Question

What will be an ideal response?

Answer 1

Firms have a number of ways to obtain funds for R&D activities. The first is bank loans. The cost of this form of financing is the interest payment, and the marginal cost is the market interest rate on an extra dollar borrowed.
Another form of funding is bonds, in which the firm issues bonds and sells them on the bond market. The cost of these financing elements is the interest paid to bondholders and the marginal cost is the interest rate on an extra dollar borrowed.
The next form of funding available to firms is retained earnings. Large, well-established firms may have corporate savings they can draw on to fund R&D activities. The marginal cost of these funds is the interest rate they could have earned being saved in a financial institution.
Venture capital is another form of funding. Households contribute funds to a business in exchange for a share of profits should the ventures succeed. This kind of funding is mainly used by smaller start-up firms. The marginal cost of venture capital is the share of expected profits that must be paid to those who contributed the money—this can be stated as a percentage of the venture capital, which essentially functions as an interest rate.
The last form of funding available to firms is personal savings. This is mainly used by individual entrepreneurs. The marginal cost of this form of financing is the forgone interest rate they could have earned by saving the funds in a financial institution.