The Office of the Chief Scientist and the Financing of Israel's High Tech Research & Development, 2000-2010

Entrepreneurial Finance and the Effects of Restrictions on Government R&D Subsidies

“…In this case, failing to control for the appropriate trends would imply that the effect of the policy reform indicator on the likelihood of a startup applying for a subsidy is upward biased. While in our regressions we control for sector-specific time trends, in Panels A and B of Table A2, we present the results from estimating equations (4) and (5) in separate subsamples of ICT and non-ICT startups. The reason is that the effects of the policy reform on non-ICT startups should be uncorrelated or less correlated with the bursting of the dot-com bubble.…”

“…subsidized applicants and non-applicants (I vs. III); iii) non-subsidized applicants and non-applicants (II vs. III). This table reports the estimations of equations (4) and (5) for the likelihood that a startup applies for an R&D subsidy. In columns I and II, the results are for the entire sample of startups; in columns III and IV the results are for startups founded through 2006; in columns V and VI for startups founded through 2006, excluding applications filed after two years from a startup's inception; in columns VII and VIII for startups founded during 1997 through 2006, excluding applications filed after two years from a startup's inception.…”

“…The vector X i contains a similar set of regressors to the ones we used in equations (4) and (5). Specifically, we control for the number of a startup's founders, the startup's age at application, and an indicator for whether a startup developed university inventions.…”

“…This repayment scheme implies that the grant is de facto a low interest rate loan conditional on the success of the project. 5 As we detail later, the OCS imposes restrictions on the external transfer of the know-how generated from the subsidies and penalties when these restrictions are violated. These restrictions and the related penalties are a cause of concern in Israel and abroad, as evidenced by the abundance of websites warning Israeli firms as well as non-Israeli investors about the costs of undertaking R&D projects with government subsidies.…”

“…Reassuringly, we do not observe significant pre-existing trends in the probability of applying for a subsidy. A possible concern is that the Israeli policy reform may have been introduced in response to the bursting of the dot-com bubble, which negatively impacted the Israeli economy in [2001][2002] (Cohen et al, 2010). To address this concern, we re-estimate our equations in separate subsamples of information and communication technology (ICT) startups, relative to which the policy reform may be endogenous, and non-ICT startups that were not directly affected by the burst of the bubble.…”