Economic literature has shown that government policies that reduce firms\' costs

Question

Economic literature has shown that government policies that reduce firms' costs for taking risks can result in a long-term reduction in innovation. For example, as companies establish their positions in the market (by remaining in the market even if these companies may have temporarily experienced financial problems), these companies may create barriers to prevent competitors from entering those markets. Think of at least 2 ways to develop or alter current policies that can encourage firms to take risks but reduce the degree to which long-term reduction in innovation.

Explanation / Answer

If government wants companies to take risk then it has to ensure soome sort of safety and security over those risk. To which the government need to work as guaranteer. However if government takes care of financial problems of risk taking companies it may induce compnaies to increase competition and establish barriers to entry hindering long run innovation.

To take care of this problem one measure could be a little bit involvement of public companies in risk taking private companies. If public companies join hands with private companies and provide financial and managerial support while taking the risk, simultaneously it can also help reducing barrier to entry to ensure long run growth and innovation in market.

ANother way could be keeping a watch over market concentration. It should provide regulatory measure to have a watch over actions of companies who receive help for taking risk. So that these companies do not concentrate the market power in their hand and create hurdles in growth and innovation in the industry.

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