EIRC Internal Seminar – Jihye Yeo on “Government financial support and firm innovation”


Date: Tuesday, January 24th, 2023

Time: 12:00 to 13:30

Paper by: Jihye Yeo

Discussant: Pia Arenius


On January 24th, 2023, Jihye Yeo presented her working paper on “Government financial support and firm innovation”.

Such fascinating topic attracted many of us and generated a great discussion around important topics such as how to measure firm innovation, government support, and so on.

Congratulations to Jihye and to all participants, as well as to Pia Arenius for doing an excellent job as discussant and providing some editorial guidance during the seminar and afterwards.


“Government financial support and firm innovation” by Jihye Yeo


Government financial support influences firm innovation through two alternative mechanisms: ‘additionality’ (which is desirable) or ‘crowding-out’ (which is inefficient). We aim to disentangle which of these mechanisms drives empirical observations of a positive effect of government funding on firm innovation. We achieve this through formulating and testing two competing moderator hypotheses, each one being a unique derivative of the additionality and crowding-out mechanisms respectively. Our empirical analysis uses Australian small and medium-sized businesses’ longitudinal data over 2011-2016, and addresses both endogeneity and selection problems in our estimation. We find that government financial support increases innovation in recipient firms. However, we also find that this positive effect is likely a result of the crowding-out mechanism. Financially unconstrained firms appear to benefit more from government support than financially constrained firms.