Strategic R&D projects choice of the firm: theory and evidence from Korea

ABSTRACT

This paper analyses the impact of the financial costs of using innovation projects supported by government grants on firm's innovation project choice through a theoretical model. Then, theoretical predictions are verified by using unique data. In particular, we utilise the quasi-experimental environment brought about by the institutional characteristics of Korea's R&D grant programme and estimate the effect of the cost difference faced by the firm on the type of innovation outcomes (product or process innovation) through the regression discontinuity design. We theoretically confirm that a firm that has to pay a high price to utilise an innovation project chooses a risky project compared to a low-cost firm. The results of empirical analysis show us that a firm with a high cost to use a project creates more product innovation than it does not.

KEYWORDS:

• Economics
• entrepreneurship
• technology & innovation studies
• product and process innovation

Acknowledgements

I am especially indebted to my adviser Linda Cohen for the patient guidance, encouragement, and advice she has provided. I wish to thank you Jan Brueckner for helpful comments. I also want to express my thanks to Michael McBride for his insights and kindness. I thank the editor and two anonymous referees for their insightful comments. I would like to express my sincere appreciation to Eunjung Park and Emily Moon for their kind inputs and helpful encouragement.

Disclosure statement

No potential conflict of interest was reported by the author.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 This is an important prerequisite for the empirical analysis to be covered in Section 4, and we will carry out further tests as to whether there are statistically significant differences in characteristics that may affect the innovation performance and choice of firms around the cutoff.

2 The number of employees is the main criterion that distinguishes between a large firm and a small firm. However, the capital owned by the firm is also considered for exceptional cases. For example, a firm employing more than 300, but with a capital of less than $8 million, would be classified as a small firm; a firm with the opposite characteristics could be classified as a large firm. However, over 95% of firms in the sample are classified either as a small firm or a large firm solely according to the number of employees.

3 The main reason is that R&D grant paybacks are not classified as taxes and operate as a condition accompanying the contract.

4 As explained in the previous section, treatment is determined by the number of employees, but the amount of the firm's capital is also taken into account. Therefore, some firms have more than 300 employees but are classified as small firms and vice versa. However, as can seen from the figure, the treatment assignment rule applies to about 95% of the observations, so we use the sharp RD design to estimate the treatment effect.

Additional information

Notes on contributors

Byunggeor Moon

Byunggeor Moon is an Assistant Professor of Department of Economics and Trade at Sejong University. His research covers a wide range of innovation activities focusing primarily on the impact of government support for innovative activities on firms' strategic choices and financial conditions.