Assessing the Effect of the Size of R&D Subsidies on the Economic Performance of SMEs: Comparison of Manufacturing and Service Firms in Korea

The Korean government’s R&D subsidies for small- and medium-sized enterprises (SMEs) are the second largest after the USA, and comprehensive quantitative analysis of their effectiveness is necessary. In this study, we observed the effect of the Korean government’s R&D support for SMEs from 2014 to 2017 using various performance indicators (growth in sales, gross profit, net profit ratio, labor cost, debt, and fixed assets) up to 4 years after support. The effect was estimated using propensity score weighting, and the changes in firm performance according to the size of the subsidy were examined using the generalized propensity score. For the manufacturing sector, R&D support seems to have helped firms increase their sales and profitability, expand employment, and enhance debt financing and investment in fixed assets. In the service sector’s case, an increase in debt and fixed assets and improvement in short-term profitability were observed, but no effect was observed in sales and employment growth. Both threshold and inverted-U effects were observed between subsidy level and firm performances. This implies that the size of the R&D subsidy for each SME should be neither too high nor too low but at an appropriate level.