Studies supporting government directed innovation are methodologically suspect – government support is more likely to encourage rent-seeking

A literature review summarizing 77 different studies of government support schemes reveal scattered results and that many published studies suffer methodological problems, partly related to the prevalence firms that benefit from multiple supporting activities (Zúñiga-Vicente et al. 2014). Evaluating efforts where firms receive more than one type of support is methodologically complicated. When firms have received several support initiatives, it becomes difficult to distinguish which of the supports had a possible effect, if there are competing effects, or if effects arise cumulatively. One of the countries with the longest history of offering a range of policies in support of entrepreneurship is the United Kingdom. In a long-term study of various UK government initiatives to support new and small firms, Bennett (2008) surveyed more than 2000 firms in 1991, 1997, 2002, and 2004, finding that, overall, government intervention is difficult to make effective at reasonable cost–benefit ratios. Bennett finds little evidence of market failure for growing and more innovative firms, but rather than systemic market failures in the United Kingdom only seems to influence very early-stage start-ups. Over the study period, the UK government partly decentralized previously centralized programs, which had marginal benefits for the number and type of recipient firms on the one hand, but sharply increased public costs and the bureaucracy recipient firms had to negotiate on the other. Bennett’s survey also highlights the stark gender bias in a highly disproportionate number and sum of support provided to male-led firms, compared to the average level of male- and female-led small and new firms.

Policies enacted are also highly heterogenous. Some government support comes in the form of free or subsidized advisory services, rather than as financial support. A recent study by Widerstedt and Månsson (2015) examined the effect of business counseling support from a 2004–2007 Swedish grant program, aimed at firms in peripheral regions, in which 1244 firms that applied for and received advice were compared to more than 90,000 control group firms in a matched sample. The authors found that while value added and number of employees seemed to increase more rapidly for firms that received advice compared to the control group, this effect was mainly due to increased use of labor and capital rather than increased efficiency, and the differences disappeared when self-selection of firms seeking advice was controlled for.

Other government support comes in the form of subsidized or wholly funded incubators and science parks where firms can apply for subsidized facilities, business advice, networking support, etc. What makes such incubators more (or less) successful has been amply studied in the innovation literature (e.g. Bruneel et al. 2012; Klofsten et al. 2020). However, studies that identify whether incubation is actually, on average, advantageous for beneficiaries and a cost-effective way for society as a whole to foster the creation of new innovative firms are scarce. Recent evidence from the United States, Italy, and Germany suggest that incubators are very heterogenous and that, on average, incubated firms perform no better than comparable non-incubated firms when their support comes to an end ((e.g. Amezcua 2010; Lukeš et al. 2019; Schwartz 2013). A recent comprehensive study of “the Swedish incubator program” – a governmental program overseeing the overall financial support and management of more than 40 incubators across Sweden examined how incubation affects performance of participating firms as well as innovativeness in terms of patenting among individuals managing or employees (Ejermo 2018). Comparing 296 CEOs and 2585 employees in incubated firms with a matched sample of comparable individuals in similar (non-incubated) firms in 2005–2014, Ejermo found that while incubation did not foster turnover growth or value added among participating firms, incubation did seem to foster innovativeness in the form of patenting activity among CEOs of incubated firms. For employees, there was only a small effect on increased patenting.

Further, it appears that the support schemes can distort firm behavior. Due to the prevalence of public support systems for innovation within countries where different authorities distribute various types of support – often with no or little coordination between the authorities – firms may systematically seek and obtain several grants for related purposes. Not only do this makes evaluations of various policies challenging (Zúñiga-Vicente et al. 2014) but it also creates a potential market for rent-seeking activities. Firms that are good at securing public grants may in theory be drawn from any tail in the productivity distribution but in practice authorities seek to foster ‘high-potential firms’ where they seem potential for growth and productivity improvement, meaning that below-average productive firms may easily be lured into a habit of applying for grants and public support rather than seeking to improve their productivity and gain market shares. Such firms in a sense becoming “subsidy entrepreneurs” with lingering low long-term productivity but still being able to hire skilled workers and pay them well, at least for the intermediate time horizon (Gustafsson et al. 2019). If grants designed to stimulate innovation instead led to some firms simply specializing in getting grants this may in time create an increasing market for unproductive or even destructive entrepreneurship that compete unfairly with non-subsidies firms (Baumol 1990).

Some argue that effects on innovation can only be seen in hindsight when sufficient time has elapsed. In a study conducted by parts of the coauthor team, however, the only noticeable effects are short term in the form of a ‘sugar rush’ when grants recipients are able to overspend on equipment and new staff (Gustafsson et al. 2016). Over time, the effects fade away. Lerner (2009, p.5) summarized extant evidence on government interventions for innovation as: “for each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit.”