The Effect of the Commercialization Failure of SMEs’ R&D on Survival

Abstract

While the cases of small and medium enterprises (SMEs) that succeeded in research and development (R&D) have been relatively well known and studied, there has not been sufficient research on cases of R&D failure and the consequent costs. Based upon the resource-based view, we hypothesized that commercialization failure of SME's R&D would be more severe for smaller firms lacking resources and dynamic capabilities, leading to early business closure. We analyzed 2,038 formal R&D projects implemented by South Korean SMEs with the support of a public subsidy program. We found that if an SME that implemented the R&D project failed to commercialize the outcomes of the R&D, the probability of business closure within 5 years after the completion of the project is 72% higher than if it succeeded. We also found that the commercialization failure increases the risk of business closure, particularly for smaller firms, due to a significant slowdown in sales growth. Our findings underscore the importance of the R&D planning strategies for SMEs and the need for funding agencies to improve their program segmentation and beneficiary selecting process.