Debt or equity? Financial impacts of R&D support across firm demographics
Abstract
This study utilizes data from Korea’s Research and Development (R&D) grant program to examine the impact of receiving an R&D grant on a firm’s ability to obtain external financing, taking into account the heterogeneous effects based on firm size and characteristics. By employing the propensity score matching method, we establish the causal effect of R&D support on financing and discover that R&D grants have differential effects on debt and equity financing. Our findings indicate that larger firms are more likely to acquire subsequent debt financing, whereas small firms that receive R&D grants exhibit an increased likelihood of securing equity financing, particularly among young firms. Furthermore, we identify a certification effect of R&D grants, implying that such grants may serve as indicators of the potential success of small, young firms in the market. Collectively, this study illuminates the role of R&D grants in firms’ financing decisions, providing valuable insights for policymakers and firms seeking to secure external financing.
First published online 12 December 2024
Keyword : debt financing, equity financing, public support
How to Cite
Moon, B. (2024). Debt or equity? Financial impacts of R&D support across firm demographics. Technological and Economic Development of Economy, 1-21. https://doi.org/10.3846/tede.2024.20105
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Boeing, P., Eberle, J., & Howell, A. (2022). The impact of China’s R&D subsidies on R&D investment, technological upgrading, and economic growth. Technological Forecasting and Social Change, 174, Article 121212. https://doi.org/10.1016/j.techfore.2021.121212
Bronzini, R., & Iachini, E. (2014). Are incentives for R&D effective? Evidence from a regression discontinuity approach. American Economic Journal: Economic Policy, 6(4), 100–134. https://doi.org/10.1257/pol.6.4.100
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Buisseret, T. J., Cameron, H. M., & Georghiou, L. (1995). What difference does it make? Additionality in the public support of R&D in large firms. International Journal of Technology Management, 10(4–6), 587–600.
Busom, I. (2000). An empirical evaluation of the effects of R&D subsidies. Economics of Innovation and New Technology, 9(2), 111–148. https://doi.org/10.1080/10438590000000006
Cappelen, Å., Raknerud, A., & Rybalka, M. (2012). The effects of R&D tax credits on patenting and innovations. Research Policy, 41(2), 334–345. https://doi.org/10.1016/j.respol.2011.10.001
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Feldman, M. P., & Kelley, M. R. (2003). Leveraging research and development: Assessing the impact of the US Advanced Technology Program. Small Business Economics, 20, 153–165. https://doi.org/10.1023/A:1022264031993
Feldman, M. P., & Kelley, M. R. (2006). The ex-ante assessment of knowledge spillovers: Government R&D policy, economic incentives and private firm behavior. Research Policy, 35(10), 1509–1521. https://doi.org/10.1016/j.respol.2006.09.019
García-Quevedo, J. (2004). Do public subsidies complement business R&D? A meta-analysis of the econometric evidence. Kyklos, 57, 87–102. https://doi.org/10.1111/j.0023-5962.2004.00244.x
Guo, D., & Jiang, K. (2022). Venture capital investment, intellectual property rights protection, and firm innovation: Evidence from China. Entrepreneurship & Regional Development, 34(5–6), 434–470. https://doi.org/10.1080/08985626.2022.2062618
Guo, D., Guo, Y., & Jiang, K. (2022). Government R&D support and firms’ access to external financing: Funding effects, certification effects, or both? Technovation, 115, Article 102469. https://doi.org/10.1016/j.technovation.2022.102469
Hall, B. H. (2002). The financing of research and development. Oxford Review of Economic Policy, 18(1), 35–51. https://doi.org/10.1093/oxrep/18.1.35
Harhoff, D., & Körting, T. (1998). Lending relationships in Germany – Empirical evidence from survey data. Journal of Banking & Finance, 22(10–11), 1317–1353. https://doi.org/10.1016/S0378-4266(98)00061-2
Hoenig, D., & Henkel, J. (2015). Quality signals? The role of patents, alliances, and team experience in venture capital financing. Research Policy, 44(5), 1049–1064. https://doi.org/10.1016/j.respol.2014.11.011
Howell, S. T. (2017). Financing innovation: Evidence from R&D grants. American Economic Review, 107(4), 1136–1164. https://doi.org/10.1257/aer.20150808
Hottenrott, H., Lopes-Bento, C., & Veugelers, R. (2017). Direct and cross-scheme effects in a research and development subsidy program. Research Policy, 46, 1118–1132. https://doi.org/10.1016/j.respol.2017.04.004
Hsu, D. H. (2007). Experienced entrepreneurial founders, organizational capital, and venture capital funding. Research Policy, 36(5), 722–741. https://doi.org/10.1016/j.respol.2007.02.022
Jacob, B., & Lefgren, L. (2010). The impact of research grant funding on scientific productivity. Journal of Public Economics, 95(9–10), 1168–1177. https://doi.org/10.1016/j.jpubeco.2011.05.005
Kleer, R. (2010). Government R&D subsidies as a signal for private investors. Research Policy, 39(10), 1361–1374. https://doi.org/10.1016/j.respol.2010.08.001
Klette, T. J., Møen, J., & Griliches, Z. (2000). Do subsidies to commercial R&D reduce market failures? Microeconometric evaluation studies. Research Policy, 29(4), 471–495. https://doi.org/10.1016/S0048-7333(99)00086-4
Lach, S. (2002). Do R&D subsidies stimulate or displace private R&D? Evidence from Israel. Journal of Industrial Economics, 50, 369–390. https://doi.org/10.1111/1467-6451.00182
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Li, J., Lee, R. P., & Wan, J. (2020). Indirect effects of direct subsidies: An examination of signaling effects. Industry and Innovation, 27(9), 1040–1061. https://doi.org/10.1080/13662716.2019.1685375
Li, L., Chen, J., Gao, H., & Xie, L. (2019). The certification effect of government R&D subsidies on innovative entrepreneurial firms’ access to bank finance: Evidence from China. Small Business Economics, 52(1). https://doi.org/10.1007/s11187-018-0024-6
Mann, W. (2018). Creditor rights and innovation: Evidence from patent collateral. Journal of Financial Economics, 130(1), 25–47. https://doi.org/10.1016/j.jfineco.2018.07.001
Martí, J., & Quas, A. (2018). A beacon in the night: Government certification of SMEs towards banks. Small Business Economics, 50, 397–413. https://doi.org/10.1007/s11187-016-9828-4
Meuleman, M., & De Maeseneire, W. (2012). Do R&D subsidies affect SMEs’ access to external financing? Research Policy, 41(3), 580–591. https://doi.org/10.1016/j.respol.2012.01.001
Moon, B. (2021). Strategic R&D projects choice of the firm: Theory and evidence from Korea. Technology Analysis & Strategic Management, 33(5), 465–475. https://doi.org/10.1080/09537325.2019.1644310
Moon, B. (2022). Unleash liquidity constraints or competitiveness potential: The impact of R&D grant on external financing on innovation. European Research on Management and Business Economics, 28(3), Article 100195. https://doi.org/10.1016/j.iedeen.2022.100195
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Nelson, R. R. (1959). The simple economics of basic scientific research. Journal of Political Economy, 67, 297–306. https://doi.org/10.1086/258177
OECD. (2018). Gross domestic spending on R&D. https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm
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Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The Review of Financial Studies, 27(1), 153–179. https://doi.org/10.1093/rfs/hhs072
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Rosenbaum, P. R., & Rubin, D. B. (1985). The bias due to incomplete matching. Biometrics, 41, 103–116. https://doi.org/10.2307/2530647
Sianesi, B. (2004). An evaluation of the Swedish system of active labor market programs in the 1990s. The Review of Economics and Statistics, 86(1), 133–155. https://doi.org/10.1162/003465304323023723
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Stinchcombe, A. L., & March, J. G. (1965). Social structure and organizations. In J. G. March (Ed.), Handbook of organizations (pp. 142–193). Rand McNally.
Takalo, T., & Tanayama, T. (2010). Adverse selection and financing of innovation: Is there a need for R&D subsidies? The Journal of Technology Transfer, 35(1), 16–41. https://doi.org/10.1007/s10961-009-9112-8
Wallsten, S. (2000). The effects of government-industry R&D programs on private R&D: The case of the Small Business Innovation Research program. RAND Journal of Economics, 31, 82–100. https://doi.org/10.2307/2601030
Wu, A. (2017). The signal effect of government R&D subsidies in China: Does ownership matter? Technological Forecasting and Social Change, 117, 339–345. https://doi.org/10.1016/j.techfore.2016.08.033
Xu, Z., Meng, L., He, D., Shi, X., & Chen, K. (2022). Government support’s signaling effect on credit financing for new-energy enterprises. Energy Policy, 164, Article 112921. https://doi.org/10.1016/j.enpol.2022.112921
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Becker, B. (2015). Public R&D policies and private R&D investment: A survey of the empirical evidence. Journal of Economic Surveys, 29, 917–942. https://doi.org/10.1111/joes.12074
Becker, S. O., & Ichino, A. (2002). Estimation of average treatment effects based on propensity scores. The Stata Journal, 2, 358–377. https://doi.org/10.1177/1536867X0200200403
Bellucci, A., Pennacchio, L., & Zazzaro, A. (2019). R&D subsidies and firms’ debt financing. (Mo.Fi.R. Working Papers, 153). Centre for Studies in Economics and Finance.
Berger, A. N., & Udell, G. F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22(6–8), 613–673. https://doi.org/10.1016/S0378-4266(98)00038-7
Bertoni, F., Martí, J., & Reverte, C. (2019). The impact of government-supported participative loans on the growth of entrepreneurial ventures. Research Policy, 48, 371–384. https://doi.org/10.1016/j.respol.2018.09.006
Boeing, P., Eberle, J., & Howell, A. (2022). The impact of China’s R&D subsidies on R&D investment, technological upgrading, and economic growth. Technological Forecasting and Social Change, 174, Article 121212. https://doi.org/10.1016/j.techfore.2021.121212
Bronzini, R., & Iachini, E. (2014). Are incentives for R&D effective? Evidence from a regression discontinuity approach. American Economic Journal: Economic Policy, 6(4), 100–134. https://doi.org/10.1257/pol.6.4.100
Brown, J. R., Fazzari, S. M., & Petersen, B. C. (2009). Financing innovation and growth: Cash flow, external equity, and the 1990s R&D boom. The Journal of Finance, 64(1), 151–185. https://doi.org/10.1111/j.1540-6261.2008.01431.x
Buisseret, T. J., Cameron, H. M., & Georghiou, L. (1995). What difference does it make? Additionality in the public support of R&D in large firms. International Journal of Technology Management, 10(4–6), 587–600.
Busom, I. (2000). An empirical evaluation of the effects of R&D subsidies. Economics of Innovation and New Technology, 9(2), 111–148. https://doi.org/10.1080/10438590000000006
Cappelen, Å., Raknerud, A., & Rybalka, M. (2012). The effects of R&D tax credits on patenting and innovations. Research Policy, 41(2), 334–345. https://doi.org/10.1016/j.respol.2011.10.001
Carpenter, R. E., & Petersen, B. C. (2002). Capital market imperfections, high-tech investment, and new equity financing. The Economic Journal, 112(477), F54–F72. https://doi.org/10.1111/1468-0297.00683
Czarnitzki, D. (2006). Research and development in small and medium-sized enterprises: The role of financial constraints and public funding. Scottish Journal of Political Economy, 53(3), 335–357. https://doi.org/10.1111/j.1467-9485.2006.00383.x
Czarnitzki, D., & Hottenrott, H. (2011). R&D investment and financing constraints of small and medium-sized firms. Small Business Economics, 36(1), 65–83. https://doi.org/10.1007/s11187-009-9189-3
Czarnitzki, D., Hanel, P., & Rosa, J. M. (2011). Evaluating the impact of R&D tax credit on innovation: A micro-econometric study on Canadian firms. Research Policy, 40, 217–229. https://doi.org/10.1016/j.respol.2010.09.017
David, P. A., Hall, B., & Toole, A. (2000). Is public R&D a complement or substitute for private R&D? A review of the econometric evidence. Research Policy, 29(4–5), 497–529. https://doi.org/10.1016/S0048-7333(99)00087-6
Dimos, C., & Pugh, G. (2016). The effectiveness of R&D subsidies: A meta-regression analysis of the evaluation literature. Research Policy, 45, 797–815. https://doi.org/10.1016/j.respol.2016.01.002
Feldman, M. P., & Kelley, M. R. (2003). Leveraging research and development: Assessing the impact of the US Advanced Technology Program. Small Business Economics, 20, 153–165. https://doi.org/10.1023/A:1022264031993
Feldman, M. P., & Kelley, M. R. (2006). The ex-ante assessment of knowledge spillovers: Government R&D policy, economic incentives and private firm behavior. Research Policy, 35(10), 1509–1521. https://doi.org/10.1016/j.respol.2006.09.019
García-Quevedo, J. (2004). Do public subsidies complement business R&D? A meta-analysis of the econometric evidence. Kyklos, 57, 87–102. https://doi.org/10.1111/j.0023-5962.2004.00244.x
Guo, D., & Jiang, K. (2022). Venture capital investment, intellectual property rights protection, and firm innovation: Evidence from China. Entrepreneurship & Regional Development, 34(5–6), 434–470. https://doi.org/10.1080/08985626.2022.2062618
Guo, D., Guo, Y., & Jiang, K. (2022). Government R&D support and firms’ access to external financing: Funding effects, certification effects, or both? Technovation, 115, Article 102469. https://doi.org/10.1016/j.technovation.2022.102469
Hall, B. H. (2002). The financing of research and development. Oxford Review of Economic Policy, 18(1), 35–51. https://doi.org/10.1093/oxrep/18.1.35
Harhoff, D., & Körting, T. (1998). Lending relationships in Germany – Empirical evidence from survey data. Journal of Banking & Finance, 22(10–11), 1317–1353. https://doi.org/10.1016/S0378-4266(98)00061-2
Hoenig, D., & Henkel, J. (2015). Quality signals? The role of patents, alliances, and team experience in venture capital financing. Research Policy, 44(5), 1049–1064. https://doi.org/10.1016/j.respol.2014.11.011
Howell, S. T. (2017). Financing innovation: Evidence from R&D grants. American Economic Review, 107(4), 1136–1164. https://doi.org/10.1257/aer.20150808
Hottenrott, H., Lopes-Bento, C., & Veugelers, R. (2017). Direct and cross-scheme effects in a research and development subsidy program. Research Policy, 46, 1118–1132. https://doi.org/10.1016/j.respol.2017.04.004
Hsu, D. H. (2007). Experienced entrepreneurial founders, organizational capital, and venture capital funding. Research Policy, 36(5), 722–741. https://doi.org/10.1016/j.respol.2007.02.022
Jacob, B., & Lefgren, L. (2010). The impact of research grant funding on scientific productivity. Journal of Public Economics, 95(9–10), 1168–1177. https://doi.org/10.1016/j.jpubeco.2011.05.005
Kleer, R. (2010). Government R&D subsidies as a signal for private investors. Research Policy, 39(10), 1361–1374. https://doi.org/10.1016/j.respol.2010.08.001
Klette, T. J., Møen, J., & Griliches, Z. (2000). Do subsidies to commercial R&D reduce market failures? Microeconometric evaluation studies. Research Policy, 29(4), 471–495. https://doi.org/10.1016/S0048-7333(99)00086-4
Lach, S. (2002). Do R&D subsidies stimulate or displace private R&D? Evidence from Israel. Journal of Industrial Economics, 50, 369–390. https://doi.org/10.1111/1467-6451.00182
Largoza, G. L., Favorada, I. F. C., Reinante, C. V. G., Tan, S. G. T., & Thai, J. S. (2015). Evidence for causal interpretations of the Easterlin paradox: Propensity score matching and dose-response functions on Philippine data from the 2004 and 2014 World Values Surveys. In DLSU Research Congress 2015. Manila, Philippines. https://www.dlsu.edu.ph/wp-content/uploads/pdf/conferences/research-congress-proceedings/2015/LCCS/009LCCS_Largoza_GL.pdf
Lee, N., & Lee, J. (2019). External financing, R&D intensity, and firm value in biotechnology companies. Sustainability, 11(15), Article 4141. https://doi.org/10.3390/su11154141
Lerner, J. (1999). The government as venture capitalist: The long-run impact of the SBIR program. The Journal of Business, 72(3), 285–318. https://doi.org/10.1086/209616
Lerner, J. (2002). When bureaucrats meet entrepreneurs: The design of effective “public venture capital” programmes. Economic Journal, 112(477), F73–F84. https://doi.org/10.1111/1468-0297.00684
Li, J., Lee, R. P., & Wan, J. (2020). Indirect effects of direct subsidies: An examination of signaling effects. Industry and Innovation, 27(9), 1040–1061. https://doi.org/10.1080/13662716.2019.1685375
Li, L., Chen, J., Gao, H., & Xie, L. (2019). The certification effect of government R&D subsidies on innovative entrepreneurial firms’ access to bank finance: Evidence from China. Small Business Economics, 52(1). https://doi.org/10.1007/s11187-018-0024-6
Mann, W. (2018). Creditor rights and innovation: Evidence from patent collateral. Journal of Financial Economics, 130(1), 25–47. https://doi.org/10.1016/j.jfineco.2018.07.001
Martí, J., & Quas, A. (2018). A beacon in the night: Government certification of SMEs towards banks. Small Business Economics, 50, 397–413. https://doi.org/10.1007/s11187-016-9828-4
Meuleman, M., & De Maeseneire, W. (2012). Do R&D subsidies affect SMEs’ access to external financing? Research Policy, 41(3), 580–591. https://doi.org/10.1016/j.respol.2012.01.001
Moon, B. (2021). Strategic R&D projects choice of the firm: Theory and evidence from Korea. Technology Analysis & Strategic Management, 33(5), 465–475. https://doi.org/10.1080/09537325.2019.1644310
Moon, B. (2022). Unleash liquidity constraints or competitiveness potential: The impact of R&D grant on external financing on innovation. European Research on Management and Business Economics, 28(3), Article 100195. https://doi.org/10.1016/j.iedeen.2022.100195
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Nelson, R. R. (1959). The simple economics of basic scientific research. Journal of Political Economy, 67, 297–306. https://doi.org/10.1086/258177
OECD. (2018). Gross domestic spending on R&D. https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm
Petrin, T. (2018, February). A literature review on the impact and effectiveness of government support for R&D and innovation (Working Paper). ISIGrowth.
Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The Review of Financial Studies, 27(1), 153–179. https://doi.org/10.1093/rfs/hhs072
Rosenbaum, P. R., & Rubin, D. B. (1983). The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1), 41–55. https://doi.org/10.1093/biomet/70.1.41
Rosenbaum, P. R., & Rubin, D. B. (1985). The bias due to incomplete matching. Biometrics, 41, 103–116. https://doi.org/10.2307/2530647
Sianesi, B. (2004). An evaluation of the Swedish system of active labor market programs in the 1990s. The Review of Economics and Statistics, 86(1), 133–155. https://doi.org/10.1162/003465304323023723
Smith, J. A., & Todd, P. E. (2005). Does matching overcome LaLonde’s critique of nonexperimental estimators? Journal of Econometrics, 125(1–2), 305–353. https://doi.org/10.1016/j.jeconom.2004.04.011
Storey, D., & Tether, B. S. (1998). New technology-based firms in the European Union: An introduction. Research Policy, 26, 933–946. https://doi.org/10.1016/S0048-7333(97)00052-8
Stinchcombe, A. L., & March, J. G. (1965). Social structure and organizations. In J. G. March (Ed.), Handbook of organizations (pp. 142–193). Rand McNally.
Takalo, T., & Tanayama, T. (2010). Adverse selection and financing of innovation: Is there a need for R&D subsidies? The Journal of Technology Transfer, 35(1), 16–41. https://doi.org/10.1007/s10961-009-9112-8
Wallsten, S. (2000). The effects of government-industry R&D programs on private R&D: The case of the Small Business Innovation Research program. RAND Journal of Economics, 31, 82–100. https://doi.org/10.2307/2601030
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