The effects of innovation subsidies on growth in small firms: What role does collaboration play?

Swedish innovation policy has become increasingly characterized by various cooperative programs, where cooperation and ”co-production” between organizations is meant to generate growth and spillovers. In this working paper we evaluate growth effects on small Swedish firms that have participated in a number of R&D subsidy programs administered by Vinnova.

In recent years, it has been suggested that increased collaboration and interaction among academia, industry and government is a key component of fostering innovation and growth. This notion of collaboration as a growth-enhancing engine has impacted the policies implemented in Sweden. For example, in prop. 2016/17:50, the Swedish Government pointed to the need for academia to strengthen its links with other parts of the economy, and several publicly sponsored support programmes include collaboration between business and academia as a key component. Such interventions are often driven by a sense that more needs to be done to ensure that publicly funded research in universities and research institutes “trickles down” and benefits the private sector.

The idea of the government as a financier and/or an intermediary connection point for collaboration in research and innovation is not new. In Sweden, as in most comparable countries, there has historically been substantial R&D cooperation between the government and business. Prior to the 1980s, the government subsidized large R&D investments in private firms developing technologies of strategic importance, such as energy, telecommunications and defence. Ever since, successive iterations of collaborative R&D programs have been instituted.

Given the efforts to achieve increased collaboration between business and academia – efforts where the government, to some extent, takes the role of an intermediary – there have been surprisingly few quantitative, counterfactual, firm-level studies on the real impact of subsidized R&D collaboration on firm performance and growth.

In this study, we analyse a specific form of collaboration, namely how the composition of project participants in publicly funded support programmes impacts the growth of small participating firms (firms with fewer than 50 employees). To this end, we have obtained detailed information on all participants, including universities, research institutes, and private firms, in all projects approved by the Swedish innovation agency Vinnova.

Specifically, we study 1,300 small firms, which participated in 65 publicly funded innovation aid programmes administered by Vinnova, the Swedish government innovation agency, during the period 2010–12. Over two thirds of the small firms applied for grants as part of R&D-consortia, with partners such as universities, research institutes and other firms. That is, projects run as collaborations between at least two participants are the dominant form of project group design.

As indicated above, a unique feature of these data is that we can identify the main applicant in each project and also have detailed information on all project members, their budget shares and their roles in the project. We are able to merge these data with register data on all firms in the economy, which gives us information on the number of employees, profits, skill composition, investments, etc. for the project participants as well as non-project participants. In combination, this information enables us, for the first time using Swedish data, to analyse how the composition of the project group influences the impact of a given grant; we are also able to compare the outcomes with those of similar non-treated firms.

Large R&D programmes typically have multiple objectives. Here, we limit the analysis to focus on three growth-related outcomes, namely sales, employment, and capital stock. Reasons for choosing these outcomes include not only ambiguity regarding what type of growth the programmes are targeting but also the fact that the outcomes are interrelated aspects of the firm’s production. The grants may have not only a direct impact on sales but also an indirect impact on sales via employment- and investment effects, which in turn may have an impact on sales. In this study, we will take a closer look at these inter­dependencies, broadening our view of the ways in which a grant can impact firm growth.

We also note that the government has instructed Vinnova to report changes in employment, sales, and value added among treated firms after programme completion.

In regard to project group composition and programme design, we will study how the impact of the grants varies with respect to the following:

  • How many projects the firm has participated in.
  • The number of project participants.
  • Type of project participants (universities, large private firms, research institutes).
  • Whether the studied firms had the role of project leader.
  • Whether the studied firm is a subsidiary of a corporate group.

The study has two main goals:

  • Increase our knowledge of how project group composition impacts growth among the small private firms participating.
  • Give policy recommendations in order to enhance future programme evaluations.

The results of the study can be summarized as follows.

The results suggest that during the project period, the grants led, on average, to increased sales growth of about three percentage points, which, after the project ended, increased to approximately six percentage points. Looking at the firms’ size distribution, the growth enhancing effect was largest among firms with 10–49 employees and not significant for micro firms with 1–9 employees. A possible explanation for this is that it may be difficult to identify firms with high growth potential when they are small and young, i.e., when they have a short history and there is a limited amount of information available about them.

Sales among firms that participated in only one project developed significantly more weakly than did sales among multi-project firms. This may be because firms that participate in a non-successful project do not return for further project participation; additionally, among returning firms, the agency may filter out firms with poor track records.

In regard to employment, there were mostly no significant employment effects.

Running project(s) with universities or research institutes seems to lead to decreases in physical capital stock. This could be because firms that seek this type of collaboration aim to strengthen their human capital rather than their physical capital stock.

We classified the programmes according to the extent to which they targeted the growth and/or the collaboration of participating firms. However, we did not find any significant relationship between the objectives of the programmes and their impacts on firm growth.

We would like to note that the results are not fully robust with respect to model formulation and estimation technique. Hence, the results should be interpreted with caution.

We would also like to emphasize that even if there are indications of positive growth effects, we cannot evaluate the overall welfare effects generated by these programmes. Although our findings on firm growth contribute to the picture, the subsidies may have important effects that we do not measure in this study.

As a final word, it is worth mentioning that there is a lack of deeper knowledge about the real effects on firm performance of different forms of collaboration. This is a knowledge gap that is not unique to Sweden, but it does have a silver lining. With the MISS database collected at the Swedish Agency for Growth Policy Analysis, featuring data on a wide range of selective firm subsidies, we are now able to – maybe for the first time with firm-level data – empirically study the real effects of different forms of collaboration.

The effects of innovation subsidies on growth in small firms: What role does collaboration play?

Serial number: WP 2018:01

Reference number: 2016/277

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