Forty percent of the entire national annual R&D budget (19 trillion won) is allocated for economic growth―including industrial and infrastructure development. In 2016, 3 trillion of the 8.1 trillion won was earmarked for the innovation of SMEs in the form of R&D grants, making Korea the second biggest spender next to the US among OECD members, ahead of Germany and Japan in absolute amount. And, thanks to the government's direct grants and indirect tax benefits, the yearly R&D investment of Korean SMEs exceeded 13 trillion won in the same year (36,026 affiliated research institutes). Korea ranks fourth, or fifth when China is included, in total corporate R&D and second1) in SME R&D among OECD nations as shown in . In particular, small firms with less than 50 employees, including start-ups, were found to invest more actively in R&D than medium-sized firms. Preceding literature on the performance evaluation of R&D support projects have mainly focused on how support contributes to increasing corporate R&D investment and intellectual property rights, and the majority of outcomes have been positive. However, with the exception of Oh and Kim (2017), very few studies deal with the economic gains of R&D support. Indeed, with the government's R&D grant for SMEs at the 3 trillion won mark, this study attempts to comprehensively assess government support projects and seek ways to enhance their effectiveness.
The government's R&D grant for SMEs has risen to 3 trillion won a year, placing Korea second among OECD nations. Indeed, analysis revealed that government support has not only expanded corporate R&D investment and registration of intellectual property rights but has also increased investment in tangible and human assets and marketing. However, there has been a lack of improvements found in the value added, sales and operating profit because the recipient selection system, which relies solely on the qualitative assessments of technology experts was ineffective. Nevertheless, if a predictive model was properly applied to the system, the causal effect on the value added could increase by more than two fold. Accordingly, to develop such a model, it is important to focus on the economic performance rather than the technical achievements. Also, more policy experiments should be conducted on small firms and a phased approach for R&D financing should to be adopted (① grant → ② equity investment → ③ loan). - Korea's R&D subsidy for SMEs has risen to approx. 3 trillion won a year, making Korea the second largest spender among OECD nations. - The SBIR, the main R&D support program for SMEs in the US, is structured in three phases. - The US case shows that the small lump sum grants for a large number of small firms is more effective than large funds for a few mid-sized firms. - The Korean government's corporate R&D support mostly targets medium-sized development activities, not small-scaled exploratory research. - Current corporate R&D support which is evaluated by the number of registered patents and publications must be reformed. - The scalability of intangible assets is as important as the economies of scale of tangible assets. - In all indicators, recipients exhibited much better performance than nonrecipients at the time of support. - In most performance indicators, recipients stand lower than non-recipients in terms of growth. The former even posted negative growth in operating profit and R&D investment. - This study estimated the causal effects using the two-step approach which integrates the nonparametric matching method and parametric regression model. - The government's R&D support contributed to SMEs' debt and equity financing, and firms expanded their investment in capabilities/ assets such as intellectual properties, relational assets, tangible assets and human capital. - Using the funding, firms invested more in capabilities/ assets, but it did not lead to improving the value added, operating profit and sales growth. - Firms with high growth prospects were selected as recipients in a smaller proportion while those with low growth prospects were selected as recipients in a larger proportion, making the value added growth of recipients lower than the average. - Estimation of the heterogenous causal effects on the value added increments found a positive effect only in the top four deciles. - If the support given to those with negative treatment effect was redistributed, this could double the positive effect. - In keeping pace with the flexibility in corporate R&D practices, the government needs to explore an operating system in which an active exchange of feedback takes place between R&D experiments and market verification. - This study suggests reforming the existing recipient selection practice which is solely based on the qualitative evaluation by technology experts, and promoting the use of the predictive model and a phased expansion of policy experiments. - Evaluations should target economic performance, not publications, IP rights and R&D amount, and a selection model should be developed to optimize the evaluation results. - In accordance to risks associated with the respective stages of R&D and commercialization, the government needs to choose the most suitable financing methods among grants, equity investment and loan support. - More free contests should be offered.
Government R&D grants for SMEs have risen to three trillion Korean won a year, placing Korea second among OECD nations. Indeed, analysis results have revealed that government support has not only expanded corporate R&D investment and the registration of intellectual property rights but has also increased investment in tangible and human assets and marketing. However, value added, sales and operating profit have lacked improvement owing to an ineffective recipient selection system that relies solely on qualitative assessments by technology experts. Nevertheless, if a predictive model is properly applied to the system, the causal effect on value added could increase by more than two fold. Accordingly, it is important to focus on economic performance rather than technical achievements to develop such a model.
The KDI Journal of Economic Policy (KDI JEP) is a professional journal published on a quarterly basis. The Journal publishes papers on the academic and policy issues related to the development of Korea's economy. The KDI Journal of Economic Policy welcomes innovative and insightful academic papers on all areas of economics with an emphasis on empirical analysis that contain solid policy implications. KDI JEP is published in English starting in 2015, volume 37 number 1. The Journal aims to disseminate research outcomes and policy recommendations not only to experts at academia and research institutes but also to policy-makers and the general public. First published in March 1979, the original objective was to circulate ongoing- and past researches conducted in KDI, a leading economic think-tank of South Korea. Starting in August, 2001, the Journal has accepted manuscripts from outside in order to provide the readers more diverse perspectives on Korea's policy initiatives. The Journal now actively seeks and welcomes submissions by researchers at home and from abroad who have genuine interests in the Korean economy.
