Abstract

Purpose: This study examines the effects of government subsidies on small and medium-sized enterprises (SMEs), focusing on their economic, technological, and social impacts. By assessing pre- and post-subsidy performance, we aim to determine whether government R&D funding effectively enhances firm growth and innovation. Research design, data, and methodology: Using a panel dataset of 552 SMEs that participated in the 2019 Start-up Growth Technology Development Program, we employ a two-way fixed effects model to evaluate the impact of government R&D subsidies. Our empirical approach controls for firm-specific heterogeneity and time effects, and we further analyze time-lagged effects to capture the long-term influence of subsidies. Results: The analysis demonstrates that government R&D subsidies exert a statistically significant positive impact on patent applications, whereas no significant effects were observed on sales, exports, internal R&D investment, or employment. The time-lagged analysis revealed that sales, exports, and internal R&D exhibited the largest positive coefficients in the year immediately following subsidy disbursement, though these effects lacked statistical significance. These findings suggest that while government R&D subsidies effectively enhance firms' innovation capabilities, the translation of these innovations into financial performance requires additional time and complementary processes, highlighting the temporal complexity of innovation-driven growth dynamics. Conclusions: While government subsidies may not yield immediate returns, their long-term effects on exports suggest their role in fostering firm competitiveness and technological advancement. Given that SMEs and startups are the backbone of South Korea’s economy, continuous support is essential to promote innovation and sustainable growth.