Government R&D Subsidies and the Dual Performance of Marginal Firms: Divergent Effects on Financial and Technological Outcomes in South Korea
Abstract
Government R&D subsidies are a key policy instrument for promoting innovation among small and medium-sized enterprises (SMEs), yet their effectiveness in revitalizing marginal or zombie firms remains conceptually contested and empirically insufficiently understood. This study addresses this gap by examining the differential effects of government R&D support on the financial and technological performance of 882 marginal firms in South Korea over the period 2012–2018. Using probit and Poisson regression models, we find that government R&D subsidies exert no statistically significant influence on financial performance indicators such as sales growth, but have a positive and statistically significant effect on technological performance, measured by the generation of domestic and foreign patents. This study makes four main contributions. First, by jointly analyzing financial and technological outcomes, we identify heterogeneous effects of R&D subsidies on marginal firms and show that technological capabilities may persist even under conditions of prolonged financial distress. Second, we challenge “all-or-nothing” policy narratives that depict marginal firms as uniformly unproductive, demonstrating instead that a subset of these firms possesses latent innovative capacity that responds positively to targeted public support. Third, we advance a refined theoretical framework that helps reconcile mixed findings in prior research, arguing that limited absorptive capacity and structural market barriers constrain the commercial translation of innovation while leaving technological innovation pathways relatively intact. Fourth, we derive concrete policy implications by advocating for the development of integrated inter-ministerial information systems to identify and monitor marginal firms with genuine R&D potential, thereby enhancing the efficiency of resource allocation and reducing the risk of indiscriminate subsidization of persistently unproductive enterprises. Overall, our findings support a shift from uniform to differentiated innovation policy, prioritizing firms with credible recovery prospects and demonstrable innovative capacity. In doing so, the study offers a more nuanced understanding of how public R&D investment can catalyze sustainable innovation among SMEs operating at the margins of economic viability, with broader implications for innovation policy design in both emerging and advanced economies.
Keywords: R&D subsidies; Government R&D support; Marginal firms; Zombie firms; Financial performance; Technological performance; Patent output; Innovation performance; Small and Medium-sized Enterprises (SMEs); Absorptive capacity; Innovation policy; Public support programs; Firm-level innovation; Distressed enterprises; South Korea.
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