An Analysis on the Effect of the Government R&D Subsidies on the Private R&D Investments : in the Case of the Pharmaceutical Industry

The purpose of this study is to analyze the effect of the R&D subsidies by the government on the private firms` R&D investments in the Korean pharmaceutical industry, which are supposed to have positive effects on their economic performance. We also estimate the relationship between the private firms` R&D investments and firms` economic outcome. Empirical analysis is done by Error Component 2 Stage Least Squares(EC2SLS) estimation using 43 pharmaceutical firms` 8 years` panel data. The elasticity of the government R&D subsidies on the private R&D investments is 0.021%, which we cannot say `efficient`. Also R&D investments have positive effects on the economic outcome of the pharmaceutical firms, as we expected. We propose several suggestions in the conclusion for the efficient way of government R&D subsidies to induce more private R&D investments.