Research and Development: Financial Constraints and the Role of Public Funding for Small and Medium-sized Enterprises

This paper presents microeconometric evidence on financing contraints for research and development activities in German small and medium–sized firms (SME). Special attention is paid to the role of public R&D subsidies. For this purpose SME in Western and Eastern Germany are compared because these regions are very different in their supply of public R&D funding. It turns out that Western German SME are financially constrained in their R&D activities by both internal and external resources. In Eastern Germany, firms are not sensitive to external constraints, possibly due to high public R&D subsidies. The results suggest that R&D in Eastern Germany is to a large extent driven by public subsidies since the German re–unification in 1990 and that the usual financial market mechanisms are repealed with respect to R&D in this region.

Czarnitzki, Dirk (2002), Research and Development: Financial Constraints and the Role of Public Funding for Small and Medium-sized Enterprises, ZEW Discussion Paper No. 02-74, Mannheim, published in: Scottish Journal of Political Economy.