The effectiveness of public subsidy on innovation and subcontracting regimes in Korean manufacturing SMEs

ABSTRACT The objective of this study is to verify whether the additionality effect of the public subsidy varies depending on the nature of subcontracting regimes in which manufacturing Small and medium-sized enterprises (SMEs) are subcontracted to large firms. This study adopted the propensity score matching method using inverse probability weights to estimate the average treatment effect on the treated. This research found that the effects of the public subsidy on the input, behavioural, and output additionality varies depending on the subcontracting regimes in manufacturing SMEs. This study also shows that the lower the hierarchical position within subcontracting regimes the more effects of the public subsidy on the input and output additionality are reduced, signalling that the lower the hierarchy of the subcontracting regimes, the less the effectiveness of public subsidy in promoting innovation of SMEs. The results imply that the position of SMEs embedded in subcontracting regimes needs to be considered to mitigate factors that inhibit innovation to correct market failures and improve the knowledge spillover. Further, this study suggests that SMEs need to establish the optimal innovation strategy that can leverage their capability and resource dependence with consideration of their position in the subcontracting regimes.