Subsides for high-tech start-ups: Does the policy instrument matter
Professor of Economics of Innovation | Technische Universität München · TUM School of Management (Germany)
New firms in high-tech sectors contribute to innovation, competition, and employment growth, but positive externalities like knowledge spillovers can prevent entrepreneurs from appropriating the full returns from their investments. In addition, uncertainty and information asymmetry pose challenges for start-up financing. Public policy programs therefore aim to support new firms. This study evaluates the effects of participation in such programs on the performance of new high-tech firms founded in Germany between 2005 and 2012. Distinguishing between grants and subsidized loans and after matching recipient and non-recipient firms based on a broad set of founder and company characteristics, we find that grants are better suited than loans for increasing high-risk R&D investments, but only the receipt of both grants and loans improves innovation performance and reduces the likelihood of bankruptcy. Although grants and subsidized loans have little short-run effect on overall employment and revenue, we conclude that young firms benefit from grants without repayment obligation through financing of early stage R&D. Combined with subsidized loans, grants facilitate turning research results into marketable products via complementary investment in tangible assets. Finally, we find a crowding-in effect, rather than a crowding-out, of private venture capital.
Hanna Hottenrott joined TU Munich’s School of Management in May 2016. Prior to that, she was assistant professorship at the Düsseldorf Institute for Competition Economics (DICE) since 2013. She holds an advanced degree in economics from the University of Heidelberg (Germany) and obtained a PhD in applied economics from KU Leuven (Belgium) in 2010. At KU Leuven she was affiliated with the Department of Managerial Economics, Strategy and Innovation and worked on topics relating to the financing of research and development (R&D) in the business sector. After graduating she was awarded a fellowship from the Flemish Science Foundation (FWO) and investigated questions in the fields of innovation and science policy. Hanna Hottenrott’s areas of interest involve industrial economics and applied micro-econometrics. In particular, her research examines the economics of innovation, science and technological change.
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