Linear or Nonlinear? Investigation an Affect of Public Subsidies on SMEs R&D Investment

The purpose of this research is twofold: First, it aims to clarify the public subsidy effect on Small-Medium Enterprises' (SMEs') R&D expenditures by contrasting total R&D investments and net R&D investments excluding the amount of public funding. The second aim is to determine whether government subsidies induce firms to nonlinearly invest their own funds in R&D. To control for potential selection bias, we estimate the policy effect through matching techniques and a dose-response function with a generalized propensity score, using panel data that link the 2015 through 2019 waves of the South Korean Survey on the Technology of SMEs. We were not able to reject the hypothesis that uses a linear effect of public subsidies on SMEs' R&D investments, suggesting a complementary effect on total R&D expenditures and a partial crowding-out effect for the net R&D case without a specific minimum threshold or a saturation point. Further investigation of a possible heterogeneous effect based on a subsample shows a U-shaped relationship, with a minimum threshold in the manufacturing industry. Our findings imply that public financial support for SMEs in South Korea has not completely prevented market failure beyond a certain level of public intervention. Importantly, the absolute amount of direct public support for individual SMEs should be increased in order to efficiently promote R&D spending in the manufacturing sector.