Recent Research: Are Subsidies Wasted When Tech Firms Fail?

Funding research and development (R&D) is risky business. Using the popular baseball analogies, venture capitalists count on one home run to make up for all of the strikeouts and pop flies. Public support for R&D in private firms, then, could be considered a gamble if policymakers are not patient or understanding of that risk. These programs also must be well managed, with an eye on the market or business aspect of any resulting technologies, to minimize the public's risk.

What happens, then, when projects or companies fail? Does a state or community reap any tangible benefits for their investments? One common assumption is value may be gained from knowledge diffusion. For instance, employees of the failed venture perpetuate growth by continuing their R&D work with other firms or in new spin-off efforts. Tracking such assertions is difficult, however, often relying heavily on anecdotal evidence and individual case studies of corporate genealogy in Silicon Valley and Route 128.

New research from Statistics Norway searches for spin-offs and knowledge diffusion in the after-effects following the country's heavy public investment in information technology (IT) during the 1980s. Unfortunately, Norway's IT sector tanked after the introduction of personal computers and a decade passed before Norwegian IT services began to emerge as world competitors.

In When Subsidized R&D-firms Fail, Do They Still Stimulate Growth? Tracing Knowledge by Following Employees Across Firms, author Jarle Moen concludes that these subsidies did not stimulate growth by either human capital nor spin-off ventures. Using government matched employer-employee data, Moen examines earnings and new spin-offs for evidence of transferred knowledge through the labor market.

Moen runs wage regression on the employees who spent at least a year in a subsidized IT firm. If these employees gained valuable knowledge during their tenure at the subsidized firm, then they should command higher wages in subsequent employment, Moen asserts. However, the study finds these employees fared no better or no worse than other IT workers in future wages.

Moen also examines spin-offs -- defined as a new firm with at least 25 percent of its employees from a subsidized firm. He finds that these firms were less profitable than other similar firms in terms of sales growth, return on assets, and return on equity.

In the end, Moen did not find evidence that earlier investment in IT manufacturing paved the way for Norway's recent success. He suggests that other research should explore how these subsidies affected the supply of IT engineers in Norway. For instance, the IT push may have created a pool of IT talent to the detriment of other sectors. Or, the glut of available IT workers may have spurred IT service growth as firms sought to exploit this relatively high value, low wage workforce.

Would the same hold true in the U.S.?

Since much U.S. research points to significant spillovers resulting from R&D investments, regardless of their private or public source of funding, one may ask about the relevance or transferability of Moen's conclusions for the U.S. SSTI welcomes comments and reactions from our readership on this question; please direct responses to skinner @ ssti.org.

SSTI suggests factors not addressed in Moen's paper that could account for the negative results should be considered in the continued refinement of state and local TBED programs. Most importantly, perhaps, is the decision-making process for which projects are selected to receive public support. Significant weight must be given to the business acumen or competence of the firm's management team and the commercial viability of the specific technologies to be funded in the face of competing technologies. Ensuring every TBED program's project review and selection process includes individuals capable for assessing such qualities may ensure greater success than was apparent for Norway's investments in information tech during the 1980s.

When Subsidized R&D-firms Fail, Do They Still Stimulate Growth? Tracing Knowledge by Following Employees Across Firms is available at: http://ideas.repec.org/p/ssb/dispap/399.html