Do Public Subsidies Affect the Performance of New Technology-Based Firms? The Importance of Evaluation Schemes and Agency Goals

Abstract

New Technology-Based Firms (NTBFs) greatly contribute to the dynamic efficiency of the economic system. To perform this role, NTBFs need external financing. However, private financing towards this typology of firms is particularly subject to market inefficiencies. This opens up the way to a policy intervention, and NTBFs often find support through the pay out of public direct subsidies. When it is based on ex-ante selective screening procedures of the applicants and awarded on a competitive basis, direct public support may exert a positive effect on NTBFs’ performance beyond the amount of the subsidy. Governments, by picking promising business projects, may signal to third parties the high quality of a firm lowering information asymmetries between firms and potential partners or private investors. We contribute to the extant literature on the impact of different types of subsidy on firm performance by crossing the 'evaluation dimension' (i.e. selective vs. automatic subsidies) with the dimension of the specific goal (R&D-enhancing vs. other measures) for which a subsidy is implemented. Our results show that: i) the evaluation mechanism and the goal of the subsidy are both important dimensions in the policy design domain ii) selective R&D subsidies outperform other typologies of schemes in fostering NTBFs’ performance.

Keywords: New technology-based firms, total factor productivity, public subsidies

JEL Classification: L26, L53, O38