Do financial constraints moderate the relationship between innovation subsidies and firms' R&D investment?

Abstract

PurposeThe purpose of this paper is to analyse whether the effect of innovation subsidies on firms' R&D investment varies depending on whether the firm is suffering from financial constraints.Design/methodology/approachTo address this analysis, the authors provide a theoretical model and test their hypothesis using an econometric analysis of an unbalanced panel of 3,865 innovative Spanish firms during 2010–2017. They employ the SABI database to obtain firms' financial and economic data and incorporate firms' MORE financial rating. Specifically, the authors use the GMM-SYS technique to regress and measure the marginal effects of innovation subsidies size on firms' R&D investment and the influence of firms' financial constraints.FindingsThe results of this work indicate that financial constraints negatively moderate the effect of subsidies on R&D investment; that is, those firms that receive a subsidy and suffer financial constraints invest less in R&D projects than those which also receive the subsidy and do not suffer financial constraints. Besides, this work found that innovation subsidies alone do not significantly increase firms' R&D investment.Originality/valueFrom a neoclassical point of view, the existence of financial constraints is the justification of public innovation policies. However, due to the difficulty of measuring financial constraints, innovation literature has abandoned the analysis of this crucial variable. This work reintroduces this vital variable and analyses how it interacts with innovation subsidies on firms' R&D investment.

Financial constraints, government subsidies, and corporate innovation

“…SA it is a negative indicator, namely a larger SA it indicates a less severe financial constraint. Considering the existing research arguing a non-linear influence of financial constraints [ 14 , 20 , 43 ], a squared form of the SA index is introduced, denoted as .…”

“…However, even though economic theory justifies government subsidies for alleviating market failures, it also points out concerns about its effectiveness and efficiency [ 9 ]. Classical economic theory is particularly concerned with the effectiveness of governments in promoting corporate innovation [ 14 ]. Governmental intervention is recommended to be indirect (e.g., by creating a preferable environment) instead of taking a “hands-on approach” [ 27 ], because direct subsidies might generate a possible crowding-out effect [ 7 , 13 ].…”

“…Another concern is the problem of corruption, which leads to under-efficiency [ 4 , 6 ]. Thus, whether subsidies promote innovation remains an unsettled empirical question [ 14 , 29 ].…”

“…Previous research implies that the way government subsidies interact with financial constraints influences R&D investment [ 14 , 20 ], which indicates a moderating effect between government subsidies and financial constraints on corporate innovation [ 43 ]. Takalo and Tanayama (2013) model the interactions between subsidies and corporate financial conditions, and argue that the expected effects of subsidies are heterogeneous; that is the optimal subsidy level depends on the severity of financial constraints [ 44 ].…”

“…According to market competition theory, financial constraints promote corporate innovation because corporations tend to pursue competitive advantages by innovating [ 13 ]. Moreover, whether government subsidies promote or crowd out corporate innovation is still being debated in recent research [ 14 ]. Another concern is the possible bias or corruption related to political connections [ 4 , 6 ].…”