Do policy makers take grants for granted? The efficacy of public sponsorship for innovative entrepreneurship

Abstract

Research Summary We investigate the short‐ and long‐term effects of public sponsorship in the form of grants on venture growth and subsequent investment funding. We adopt a temporal approach and assess our results using discontinuous growth modeling. This approach allows us to unpack the complexity of sponsorship interventions and provide insights into how quickly, how long, and under what conditions grants augment growth. Using a proprietary sample of 129 ventures located in eight incubators, we find that securing an initial grant increases the rate at which ventures acquire private investment capital but not revenue over time. We draw on resourcefulness theory and signaling theory and explore the moderating role of venture size. We discuss our contributions to the entrepreneurship and public policy literatures. Managerial Summary Are public grants effective at sparking entrepreneurial growth? To deepen our understanding of public policies that are designed to promote innovative entrepreneurship, we investigate the short‐ and long‐term effects of new venture grant sponsorship. We study 129 ventures located in eight business incubators over a 4‐year period. Our results indicate that although there are initial advantages to receiving a grant, there are also potential shortcomings as grant receipt does not directly influence long‐term revenue growth. We theorize that having abundant access to grant capital reduces the ventures need to “stretch” resources and grow revenue over time. Yet, initial grants seem to signal to investors that the venture represent a “good bet” as investment trajectories follow the opposite growth pattern, increasing steadily over time.

The Efficiency of National Innovation Policy Programs: The Case of Serbia

“…Scholars agree that funding opportunities determine the innovation success of SMEs by increasing the level of innovation activities, output performance, productivity, and competitiveness [28,46,52,57]. The novelty of this research lies in its quantitative evaluation of innovation policy programs using a methodology that examines the direct relationship between public funding and an increase in the operating revenues of the beneficiary SMEs.…”

“…Moreover, subsidies have a positive and significant treatment effect on new technology-based enterprises' total factor productivity growth, but only if subsidies are provided competitively and are targeted to increase R&D investments. The authors in [52] used a proprietary sample of 129 startups located in eight incubators to find that securing an early grant enhances the rate at which initiatives gain private investment capital but not revenue over time. The authors in [53] revealed that subsidies are an important policy instrument in encouraging young innovative companies to develop inventions.…”

Policy for innovative entrepreneurship: Institutions, interventions, and societal challenges

“…The type of support also matters, whether it comes through training, funding, or advising, as exemplified in the article of Astebro and Hoos (2021). Policy treatments may also impact recipient ventures in differential ways, as exemplified by Stevenson, Kier, and Taylor's (2021) findings that public grants may enhance the likelihood of receiving subsequent (private) investments, but also negatively affect the venture's revenue growth over time. These are examples of the thorny issues and potential tradeoffs for policymakers and researchers evaluating conditions under which successful policies can outweigh potential costs and crowding‐out effects on firms not included in policy initiatives.…”

“…They highlight several themes from our macro–micro policy integration framework and wrestle with the tradeoffs associated with policy interventions. Two focus on macro themes (Teodorescu & Kuhn, 2021; Wang, Malik, and Wales, 2021), two address micro themes (Astebro & Hoos, 2021; Stevenson, Kier, & Taylor, 2021), and two incorporate elements of both (Lamine, et al, 2021; Murtinu, 2021).…”

“…Stevenson et al (2021) draw from resourcefulness and signaling theory to examine grant funding for 129 new ventures inside eight U.S.‐based incubators (another form of public sponsorship) over a 4‐year period. The article exploits discontinuities between pre‐ and post‐funding characteristics to assess short‐ and long‐term effects of grants on firm growth and follow‐on private investment.…”