Entrepreneurial Finance and the Effects of Restrictions on Government R&D Subsidies

Abstract

Entrepreneurial ventures often face liquidity constraints. Governments have intervened by providing R&D subsidies, however these subsidies often come with restrictions. We study the impact on venture outcomes of one important restriction, namely the inability to transfer know-how away from a given geographic area. Using novel data on Israeli startups, we find that relaxing this restriction induces applications from higher-quality firms that would have been most likely deterred by the initial restriction. Consistently, the effect of R&D subsidies on startups' survival, ability to attract external investment, and innovation is largest among recipients applying for subsidies after the restriction is relaxed. Overall, these findings indicate that the social impact of reducing restrictions on R&D subsidies is affected by the quality of startups that are induced to apply.