Do government subsidies promote firm-level innovation? Evidence from the Korean renewable energy technology industry

This study investigates how government policies affect firm-level innovation. To empirically test this relationship, we use panel data for the Korean renewable energy technology firms. Taking into account the results of various panel framework tests and sample size, we establish a panel vector autoregressive model in the first difference, and use a bias-corrected least squares dummy variable estimator to test complex dynamic relationships between public subsidies, firm heterogeneities (size, age, and slack), industry dynamic competition, and innovation. Based on the estimations, we find that there is a positive bidirectional causal relationship between firms' innovation and each of the following: research and development (R&D) subsidy, available organizational slack, and industry dynamic competition. Non-R&D subsidy, firm size, and age do not have significant direct effects on firm-level innovation. However, non-R&D subsidy is involved in the relationship between R&D subsidy and firms' innovation. We discuss some implications based on the findings of this study.