Start-up Subsidies: Does the Policy Instrument Matter?

52 Pages Posted: 15 Nov 2019

See all articles by Hanna Hottenrott

Hanna Hottenrott

Technische Universität München (TUM)

Robert Richstein

Heinrich Heine University Dusseldorf

Date Written: October 2019


New knowledge-intensive firms contribute to innovation, competition, and employment growth, but externalities like knowledge spillovers can prevent entrepreneurs from appropriating the full returns from their investments. In addition, uncertainty and information asymmetry pose challenges for financing. Public policy programs therefore aim to support start-ups. This study evaluates the effects of participation in such programs on the performance of start-ups in high-tech and knowledge-intensive sectors that were founded in Germany between 2005 and 2012. Distinguishing between grants and subsidized loans and after matching recipients and non-recipients based on a broad set of founder and company characteristics, we find that both grants and subsidized loans facilitate tangible investment, employment and revenue growth. Grants are, however, better suited to increasing R&D investments than loans are. Combined with grants, subsidized loans facilitate turning research results into marketable products by means of investments in tangible assets. Start-ups that participate in both types of programs outperform grant-only recipients in terms of innovation performance, employment and future revenues. Finally, program participation does not crowd out private venture capital.

Keywords: financing constraints, subsidies, R&D, high-tech start-ups, innovation policy

JEL Classification: G32, H25, O38

Suggested Citation

Hottenrott, Hanna and Richstein, Robert, Start-up Subsidies: Does the Policy Instrument Matter? (October 2019). SWPS 2019-23, Available at SSRN: or

Hanna Hottenrott (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333

Robert Richstein

Heinrich Heine University Dusseldorf ( email )

Universitätsstrasse 1
Duesseldorf, DE NRW 40225

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