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64 Pekka Himanen and Manuel CastellsThe financing of innovationThe stock of knowledge depends on society’s and firms’ investment inresearch and development. Innovation is, by definition, risky. So, high-riskfinance is a fundamental pre-requisite for start-up firms in Silicon Valley. Oneform of this investment is research and development (R&D) funding. TheUnited States has always invested heavily in innovation. For years, its nationalR&D investment has topped the world and continues to be considerably abovethe average for the advanced economies (see figure 2.8). This funding hasmade the world’s leading research in the technology fields possible, with thetop universities producing highly talented innovators.In Silicon Valley, a key innovative role has been played by the two topuniversities Stanford (private) and the University of California at Berkeley(the leading campus of the state’s system). The graduate schools of these twouniversities, as well as their computer science programs, are consistentlyranked among the top five in the United States. Business links with this publicresearch and development. Universities and business have close relationsalong the lines of Terman’s strategy: as leading researchers have joint projectswith companies, knowledge about future key areas becomes shared. Thisknowledge goes in two directions: the top business leaders and engineers alsoshare their knowledge with the universities. For instance, the former chairmanof Intel, Andy Grove, has taught at Berkeley. Business also donates funding touniversities to further develop human talent.But the most important element in Silicon Valley is venture capital. Mostof the innovative, highly productive firms were start-ups at some point in thepast three decades. Venture capital is at the source of entrepreneurship that4.03.53.02.52.01.51.019851986198719881989199019911992199319941995199619971998199920002001Finland US Advanced economiesSource:OECD Main Science and Technology IndicatorsFigure 2.8 National R&D investment as a percentage of GDP, 1985–2001