The Impact of Government R&D Subsidy on Firm Performance: Evidence from Korean SMEs

This paper empirically explores the R&D promotion policy effects on SME performance measured by value-added productivity. We use a unique large panel data set on public R&D subsidy for Korean manufacturing firms. Econometrically, we control for counter-factual outcomes employing the DID (difference in differences) estimation procedure as well as for endogeneity of the R&D subsidy using the 2-stage Tobit/Logit-DPD (dynamic panel data) procedure. We find significant evidence for positive productivity effect of the public R&D subsidy. The subsidy has successfully raised the R&D expenditure and value added productivity of Korean manufacturing SMEs. It is thus fostering entrepreneurial activity and economic growth. [Forthcoming Small Business Economics] 1 Professor, Department of Economics, Kyonggi University, Suwon, Korea. E-mail: [email protected] 2 (Corresponding Author) Professor, Department of Management of Technology, Graduate School of Management of Technology, Korea University, Seoul, Korea. Email: [email protected] 3 (Corresponding Author) Professor, Center for International Science and Technology Policy & Department of Economics, The George Washington University, Washington, DC, USA. Email: [email protected] Acknowledgement We are grateful for helpful comments from Prof. Kuhlmann and participants in the Asian Research Policy Symposium 2013, “Asian Model of Innovation: Innovation and Creative Economy,” Seoul, Korea.