Association for Public Policy Analysis & Management

This paper aims at evaluating the performance of R&D expenses especially focusing on “employment growth,” at the firm level.  Government R&D subsidies have continued to increase over time.  This huge amount of government subsidies to SMEs may be justified when the R&D expense led to better employment growth in the SME sector.

On the basis of this observation, this study attempts to measure the effects of R&D expenses on the job creation in the SME sector.  The study supposes that R&D expenses have a direct effect on the employment growth of SMEs. In particular, the study tests the following four hypotheses.

H1 :  The present R&D expenses have a positive relations with the current employment growth of SMEs.

H2 :  There is a time interval between the R&D expenses and the employment growth of SMEs.

H3 :  The job creation effect of the R&D expenses is different by types of industry.

H4 :  Innovators enjoy superior employment growth than non-innovators .

            In the study, dependent variable is employment growth rate.  Explanatory variable is R&D expenses.  Control variables are debt ratio, business history, total assets, and year dummy. 

            For the sample, 20,930 financial statements (hereafter referred to as F/S) from 7,798 SMEs collected by Korea Credit Guarantee Fund and Korea Enterprise Data Co. Ltd. was used.  The time span encompassed by the study is the period from January 2004 to December 2010. 

            In this study, we examine the job creation effect of the R&D expenses is measured based on OLS estimation method using fixed effect model.  The employment effect of the R&D expense is analyzed to see the T+1 year, T+2 year and T+3 year, starting from target year (T).

Our main results are summarized as follow.

First of all, the results of the analysis indicated that the past R&D expenses significantly have a positive relationship with the current employment growth of SMEs. Research shows that the coefficients of variables RND_t-1 and RND_t-2 are 0.026 and are positively significant at the 10% level.  It is estimated that one year or two years after the R&D expenses, the employment growth rate is increased.

Furthermore, a main reason for the effect of the R&D expenses on job creation is the employment effect in wholesale & retail industry.  Research shows that the coefficients of RND_t-1, and RND_t-2 of SMEs only in wholesale & retail industry are 0.121, 0.173, and 0.308 respectively, and are positively significant at the 99% confidence level. 

Last but not least, the empirical results reject hypotheses H4 that the group of innovators enjoys significant employment growth non-innovators.  The coefficient of RND_t-2 of non-innovators is 0.0856 and is statistically significant at the 99% confidence level, while the coefficients of R&D intensity of innovative SMEs are statistically insignificant.