Strategic R&D projects choice of the firm: theory and evidence from Korea

Abstract

This paper analyses the impact of the financial costs of using innovation projects supported by government grants on firm's innovation project choice through a theoretical model. Then, theoretical predictions are verified by using unique data. In particular, we utilise the quasi-experimental environment brought about by the institutional characteristics of Korea's R&D grant programme and estimate the effect of the cost difference faced by the firm on the type of innovation outcomes (product or process innovation) through the regression discontinuity design. We theoretically confirm that a firm that has to pay a high price to utilise an innovation project chooses a risky project compared to a low-cost firm. The results of empirical analysis show us that a firm with a high cost to use a project creates more product innovation than it does not.