Research Policy 43 (2014) 1557–1569

Contents lists available at ScienceDirect

Research Policy
journal homepage: www.elsevier.com/locate/respol

Government support for SME innovations in the regional industries:

The case of government financial support program in South Korea夽
Soogwan Doh a , Byungkyu Kim b,∗
a
Department of Public Administration, Catholic University of Daegu, 330 Geumrak-ri, Hayang-eup, Gyeongsan-si, Gyeongsangbuk-do 712-702, South Korea
b
Department of Public Administration, Andong National University, 1375 Gyeongdong-ro, Andong-si, Gyeongsangbuk-do 760-749, South Korea

a r t i c l e i n f o a b s t r a c t

Article history: This study explores the impact of governmental support policies on the innovation of SMEs in the regional
Received 10 June 2012 strategic industries in South Korea. We use the technological development assistance funds as a proxy
Received in revised form 14 August 2013 for governmental support policies for SMEs in the regional industries in Korea. The innovation of SMEs
Accepted 4 May 2014
is measured by technological innovation: patent, utility model, trademark, and new design registrations.
Available online 2 June 2014
Before empirically testing the impact of governmental support policies on the innovation of SMEs, this
study reviews the literature concerning the innovation and the governmental support policies of SMEs in
Keywords:
regional industries. Results from empirical models, which simultaneously control for factors which were
Innovation
SMEs
thought to affect the innovation of regional SMEs, indicate that a positive relationship exists among the
R&D technological development assistance by the Korean government and patent acquisitions and new design
Regional industries registrations of regional SMEs. Networks with universities also have a positive relationship with patent
Patent acquisitions and new design registrations of regional SMEs. This study suggests there is an importance
Governmental financial support to governmental financial aids for regional SME innovations, and there is an importance to the need to
build a strong social relationship in today’s networked economy.
© 2014 Elsevier B.V. All rights reserved.

1. Introduction
Since the middle 1980s, the world economy evolved into a
knowledge-based economy driven by rapidly changing technolo-
gies and markets (Doh and Acs, 2010). Sustainable economic
performance has been, and remains, a central topic for policy
agendas around world. Accordingly, a fundamental issue that con-
tinually demands the attention of policy makers concerns the
drivers of economic performance in this contemporary knowledge-
based economy.
Over the years, a variety of arguments have been put forth
to address this issue. Each government, irrespective of countries,
have been accounting for regional and local factors which affect
entrepreneurship. This is because entrepreneurship has been
regarded as one of the important drivers of sustainable economic
development and growth in this current knowledge-based econ-
omy (Acs, 2006; Acs et al., 2004; Baumol, 2002, 2004; Audretsch and
夽 An earlier version of this study was presented at the 14th Uddevalla Sympo-
sium held in University of Bergamo, Italy in June 2011. This work was supported by
research grants from the Catholic University of Daegu in 2013.
∗ Corresponding author. Tel.: +82 54 820 5408.
E-mail addresses: doh.soogwan@gmail.com (S. Doh), bkkim1@andong.ac.kr
(B. Kim).
Keilbach, 2004; Audretsch and Thurik, 2001; Shane, 2000; Kirzner,
1997; Grossman and Helpman, 1994). In particular, each govern-
ment puts much importance on the potential contribution of small
and medium-sized enterprises (SMEs) toward economic perfor-
mance, as new technologies reduce the importance of the scale of
economies in many kinds of activities (Kramer et al., 2007; OECD,
2004a; Berry, 2002; McIntyre, 2001; Liesch and Knight, 1999).
According to OECD (2000), SMEs account for over 95% of firms,
60–70% of employment, and they generate a large share of new
jobs in OECD countries. Thus, SMEs play an important role in eco-
nomic performance in OECD areas, providing the sources for most
new jobs and innovations. The performance of SMEs in terms of
industrial renewal, job creation, export growth, and productivity
thus demands the attention of policy makers. However, many of
the traditional problems facing SMEs, such as “lack of financing,
difficulties in exploiting technology, constrained managerial capa-
bilities, low productivity, and regulatory burdens,” has become
more acute in this new knowledge-based economy (OECD, 2000:
1). Thus, each government has policy initiatives to improve SMEs
access to financing and information infrastructures, and to provide
SMEs with regulatory, legal and financial frameworks conducive to
entrepreneurship, start-up, and growth.
South Korea, an OECD member, has experienced remarkable
economic growth since 1970. The most significant factor in the

http://dx.doi.org/10.1016/j.respol.2014.05.001
0048-7333/© 2014 Elsevier B.V. All rights reserved.
1558 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
rapid industrialization was the adoption of an outward-looking
strategy in the early 1960s. The strategy promoted economic
growth through labor-intensive manufactured exports and gov-
ernment initiatives which played an important role in the growth.
However, the export-oriented development strategy of Seoul, the
capital city of South Korea, left the rural area relatively under-
developed by putting emphasis mostly on the industrial sectors.
Most industries were located in the urban areas of the northwest
and southeast parts of South Korea. Despite government efforts to
decrease income disparity between the industrial and agricultural
sectors, increasing income disparity was a serious problem in the
1970s and remains a problem still today.
Beginning with DJ Administration’s regime in South Korea,1
various strategies for balanced regional development have been
implemented under various names. In particular, policy initiatives
promoting regional industries have been a core of those strate-
gies. Considering the importance of SME innovations, the Korean
government has given large amounts of public money (about 957
million US dollars (14.2% of total R&D investment for SMEs) in 2010)
to SMEs to promote SME innovations in regional industries, begin-
ning with a public R&D investment of approximately 339 million
US dollars (11.8% of total R&D investment for SMEs) in 2005 (OECD,
2011).2 As a result of the consideration of government, South Korea
is regarded as having set a successful model for SME development.
According to recent Small and Medium Business Administration
(SMBA) of Korea’s internal report, Korean SMEs have developed
steadily as a backbone of the national economy and are making
important contributions to nation’s economy, creating new job
opportunities, the leverage necessary to strong, sustainable and
balanced growth within the frame of the global economic system.
Fig. 1 describes the status and development of SMEs in South Korea.
To have these SME initiatives implemented, it is necessary to
evaluate SME programs based on their relevance and effectiveness.
Evaluation of SME programs is essential justifying their costs and
to assist in the design of future SME programs (OECD, 2000). How-
ever, the SME initiatives of South Korea have been mainly assessed
based on each SME’s individual achievements based on reports, not
on policy objectives promoting regional industries, such as tech-
nology innovation performance (i.e. patent acquisition, new design
registration, etc.) of regional SMEs, even though huge amounts of
public funds have been invested in promoting regional industries.
Making successful governmental intervention effective at realistic
costs–benefit ratios (Bennett, 2008) – is difficult, it is needed to
evaluate government SME programs for the design of future SME
programs.
In addition, most previous studies did not consider technological
development networks with outside organizations, such as univer-
sities, public and private research institutes, and corporations, as an
important explanatory variable for regional SME innovations in the
viewpoints of innovation systems in South Korea. But, technological
development networks can catalyze SME innovations and achieve-
ments in regional industries (Eom and Lee, 2010; Link and Scott,
2005; Mowery and Sampat, 2005; Faems et al., 2005; Belderbos
et al., 2004; George et al., 2002; Hall and Ziedonis, 2001). Therefore,
various technological development networks need to be considered
in empirical models for regional SME innovations.
This study is designed to fill this gap in the previous literature on
regional SME innovations in South Korea, and is designed to empir-
ically test the impact of government support policy on the regional
SME innovations in the regional industries in South Korea. Although
1
Dae Jung Kim was the 15th President of South Korea (1998–2003).
2
The DJ government also spent a huge amount of public funds in venture capital
and business incubator industries, and it improved access to other types of financing
in view of the SME role in regional economic performance.
literature on the effect of government funding to innovation per-
formance for different sizes of firms in different countries are very
extensive already, this study focuses on the SMEs in South Korea
in that most previous studies have been intended for managers in
large companies. For those who are not too familiar with the South
Korea’s science & technology development would have the impres-
sion that the economic growth through innovation for South Korea
in the last two decades came mainly from the giant companies (so-
called Chaebols), like Samsung, LG, Hyundai, etc. The situation of
the SMEs in South Korea is largely unknown to many researchers
and readers. The contributions of this study are also different from
those of previous studies regarding the SMEs in South Korea (i.e. Yi,
2012; Lee et al., 2010; Eom and Lee, 2010; Choi et al., 2009) because
this study analyzes the impact of local government support pol-
icy funded by central government on the SME innovations using
panel data at the firm level. Thus, this study may contribute to the
literature on the effect of government support policy on the SME
innovations. This study can also give some implications of the effect
of the Korean government support policy on the SME innovations
to other developing countries.
Specifically, this study explores the impact of government sup-
port policies on technology innovation of SMEs in the Gyeongbuk
province, South Korea. Gyeongbuk has been promoting regional
strategic industry projects with the aim of creating clusters of
innovation-oriented regional development in the areas of new
materials development, electronic information devices, and orien-
tal biotechnology.
This paper is structured as follows. Section 2 reviews the exist-
ing literature on the SME innovations, the relationship between
technology development assistance by government and SME inno-
vations and government support for SME innovations, and SME
policy initiatives implemented by the Korean government. Section
3 explains the data, variables, and methodologies for the empirical
analysis. Section 4 discusses the empirical results with interpreta-
tions. Section 5 provides the concluding remarks and implications
for future research.
2. Theoretical and conceptual background
2.1. Innovation and SMEs
Innovation occurs in many forms and comprises many differ-
ent processes (Hansen, 1992). A conventional understanding of the
innovation process, which has been shaped largely by scientists,
such as Joseph Schumpeter (1942),3 John Kenneth Galbraith (1956),
and Alfred Chandler (1977), was based on the assumption that inno-
vation lies in the domain of large enterprises. Business by SMEs
would be outside the domain of innovation because of its own inef-
ficiencies, as well as its deficit of resources and knowledge assets
required to generate and commercialize ideas (Acs and Audretsch,
2005). But, the conventional understanding of the innovation has
been challenged by a new perspective known as the Entrepreneur-
ship Theory. This new understanding of innovation suggests that
entrepreneurial SMEs, as well as large established enterprises, play
an important role in innovation (Lee et al., 2010; Maula et al.,
2006; Edwards et al., 2005; Laursen and Salter, 2004; Gregory et al.,
2002; Link and Bozeman, 1991; Scherer, 1991; Acs and Audretsch,
1988, 1990, 2005; Rothwell, 1989). In other words, SMEs play a
3
Old Joseph Schumpeter (sometimes called Mark II) asserted that big compa-
nies having enough resources and capital to invest in R&D are the actors who can
drive innovation. Innovation is incremental. However, young Joseph Schumpeter
(Mark I) argued that the innovation and technological change of a nation comes
from the entrepreneurs. Innovation leads to a concentration and market power of
new dynamic firms.
 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
Fig. 1. The status and development of SMEs in South Korea.
Source: Adapted from Yi (2012) and revised by authors.
critical role in enhancing economic performance and contributing
to regional development by innovating technology and strength-
ening their capacity (Jones and Tilley, 2003). The dynamic and
positive roles of SMEs are a significant factor in building com-
petitive regional economies in a global market.4 Thus, extensive
literature has addressed the importance of SMEs in innovation (Lee
et al., 2010; Acs and Audretsch, 1990).
According to Hall and Harvie (2003), innovation is critical at
the product and process application level. And, productivity can
be a measure of the performance of SMEs as innovators.5 Product
innovations are assumed to be the result of a search for technolog-
ical competitiveness, such as the strategy of market expansion and
patenting activity (Vaona and Pianta, 2008). Process innovations
are assumed to emerge from a strategy of active price competi-
tiveness dominated by a search for efficiency (Vaona and Pianta,
2008; Antonucci and Pianta, 2002; Pianta, 2001). Thus, SMEs are
expected to rely more on innovative dynamics in terms of product
4
Especially, SME’s performance and sustainability are more important in South
Korea because a large chaebol (conglomerate) overwhelms most economic markets.
5 6
SME performance can be defined as the organization’s ability to attain its goals
by using resources in an efficient and effective manner (Daft, 1991). As a result of
innovation, productivity is an important outcome.
1559
innovations, and they critically depend on greater production flex-
ibility in terms of process innovations.6
A very large amount of literature explored the relationship
between innovation and SMEs based on market concentration and
the knowledge-based environment in which firms operate. Accord-
ing to the literature on market concentration, SMEs are more
innovative in competitive markets (De Jong and Marsili, 2006;
Laforet and Tann, 2006; Wagner and Hansen, 2005), whereas large
firms perform better in monopolistic markets and concentrated
industries with high entry barriers (Audretsch, 2001; Burke and
To, 2001; Audretsch and Mata, 1995; Acs and Audretsch, 1987).
Rothwell and Dodgson (1994) argue that the role of SMEs is more
relevant where niche markets exist and entry costs are lower.
In terms of the knowledge-based environment in which firms
operate, SMEs appear to be better at capturing the benefits of net-
working for innovation (Edwards et al., 2005; Rogers, 2004), and
at exploiting external economies deriving from a more innovative
environment by the benefit of proximity to the R&D centers of large
firms and universities (Eom and Lee, 2010; Link and Scott, 2005;
Mowery and Sampat, 2005; Faems et al., 2005; Belderbos et al.,
Large firms are expected to rely more on market power in terms of product
innovations, and they may invest more in new machinery and search for larger
markets in terms of process innovations (Vaona and Pianta, 2008).
1560 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
2004; Narula, 2004; Mangematin et al., 2003; George et al., 2002;
Hall and Ziedonis, 2001; Audretsch and Vivarelli, 1996; Acs et al.,
1994).
Recently, Audretsch (2002) showed that the patenting rate for
SMEs is typically higher than that for large firms when measured on
a per-employee basis, while large firms often produce a larger num-
ber of patents per firm. Other studies (i.e. Audretsch and Vivarelli,
1996; Bound et al., 1984) also showed that R&D productivity tends
to decline with firm size when the innovative output is measured
as patents per R&D.
Considering the prior literature, the importance and potential
contribution of the SMEs to innovation are supported by both theo-
retical and empirical arguments and evidence. Thus, governments
have supported the dynamic role of SMEs at the local, regional,
and even national levels (Jones and Tilley, 2003). Each government
has policy initiatives to encourage SMEs’ innovative activities by
improving access to financing and information infrastructures and
providing SMEs with regulatory, legal and financial frameworks
conducive to SME start-up and growth.
2.2. Government support for SME innovations
Government support for SME innovations is provided through a
multitude of policies at the local, regional, and national levels. There
is some rationale for the government support for SME innovation.
This rational includes the fact that market failures bring bias against
SMEs, small size creates cost disadvantages for SMEs, and SMEs are
limited in development capability. Given their proximity to SMEs,
local governments are, in particular, very active in the design and
delivery of programs for SME innovation. National governments
should empower local governments to take the appropriate actions
with promoting SMEs innovation. However, the role of govern-
ments should be facilitative, not dictatorial, to yield the intended
results (Wilson, 2007).
The aim of government support for SMEs is to ultimately estab-
lish, without governmental financial aid, viable, competitive, and
innovative SMEs (OECD, 2004c). Thus, a variety of support ser-
vices for SME innovation are provided by governments. These
include provisions for targeted and quality business support ser-
vices; immediate, technical, and managerial training programs;
the cutting of administrative costs and burdens of SMEs; building
network cross sectors and cross borders; provisions for finan-
cial incentives and assistance; and legal framework reinforcement
(Wilson, 2007).
First, governments provide SMEs with targeted and quality busi-
ness support services for SME innovations. SMEs need to know
how and where to access basic information about innovations, thus
providing easily accessible information with regard to innovation.
Therefore it is important to create a broader pool of SMEs who
make decisions about innovation. In addition, public institutions
play a key function in influencing attitudes and motivations by pro-
viding information and incentives to create a culture which can
positively contribute to building and sustaining an entrepreneurial
environment.
Second, prior studies (i.e. OECD, 2004b; ILO, 2001) showed that
SMEs usually lack technical and managerial skills due to limited
access to finance; cumbersome, bureaucratic, setting-up proce-
dures; operation and business growth; a infrastructure; and a lack
of effective institutional structures. Thus, governments provide
SMEs with immediate technical and managerial training programs
needed to promote SME innovation, and to foster SME competi-
tiveness and productivity. In addition, SMEs do not have the same
capacity to influence the environment in their favor as larger firms.
Regulations impose disproportional costs on SMEs. These con-
straints raise SMEs’ transaction costs and limit SMEs’ ability to
take advantage of economic opportunities. Thus, governments cut
the administrative costs and burdens of SMEs to promote the SME
innovation.
Third, many government support measures exist to help SME
innovation link with, and engage in, joint activities with other
actors, because the creation of networks in innovation is impor-
tant in this knowledge-based economy. In this knowledge-based
economy, innovation is a social process (Doh and Acs, 2010). It is
no longer achieved by isolated individuals and it is conceived as an
interactive process involving both formal and informal relation-
ships among various actors connecting through social networks
(Hidalgo and Albors, 2008; Landry et al., 2002; Pyka, 2002; Kline
and Rosenberg, 1986). Technological networks (collaboration and
partnership) between actors in markets are important sources of
innovation. Thus, governments have tried to promote alliances and
build networks among SME cross sectors and cross borders. In par-
ticular, governments improve SME access to information about
networking opportunities, increase the participation of SMEs in
research and innovation networks, support the emergence and
maintenance of innovative clusters for strengthening cooperation
among firms, and identify and promote the best practice policies
which support the innovation of SMEs through cluster develop-
ment (Wilson, 2007).
Fourth, SMEs are a special risk group because of vulnerability,
insufficient funds of their own, dependence on only a few clients,
and a lack of collateral and/or credit history. Bankers in markets
also offer higher interest rates reflecting the cost of risk and man-
agement and have no lending services provided for SMEs. Thus,
governments provide SMEs with financial incentives and assis-
tance to help the innovation of SMEs. However, innovative SMEs
must be market-driven because the over-dependence of SMEs on
public support and finance will not help SME sustainability. In
other words, too much public financial support, without market
co-investments, can hinder SME innovation by creating possible
market distortion.
Finally, governments reinforce, for SME innovation, legal
frameworks to protect intellectual properties, and discourage
monopolies and unfair trade practices. In terms of intellectual
property rights, SMEs lack a good working understanding of the
system and consequently under exploit current forms of intellec-
tual property protection. So, the reinforcement of legal frameworks
by governments is critical in the innovation of SMEs (Wilson, 2007).
While government support is often based on overcoming mar-
ket failures in the availability or use of SME support, successful
government intervention is difficult to make effective at realistic
costs–benefit ratios (Bennett, 2008). Thus, it is not possible to sug-
gest that any one kind of government support is absolutely better
than any other kind of government support for SME innovation.
The purpose of this study was to explain the role of governmen-
tal financial support in the innovation of SMEs in regional industries
in South Korea, because potential impacts on the innovation of
regional SMEs from current, large amounts of public financial aid or
funds in regional industries are needed for estimations. A particular
emphasis was placed on the contribution of government financial
support for SME innovation. Thus, the next section briefly describes
the government financial support for regional SMEs in South Korea
focusing on technological development assistance funds.
2.3. Government financial support for SME innovation in South
Korea: technological development assistance funds
SMEs play a particularly important role in the Korean economy,
because of their numbers and because of the large share of the
workforce involved in them (Nugent and Yhee, 2002). Specifically,
the number of SMEs is about 3122 thousands (99.9%) and the num-
ber of SME employees is about 12,263 thousands (86.8%) in 2010.
Table 1 shows status and trends of Korean SMEs from 2005 to 2010.
 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569 1561

Table 1
Total number and percentage share for workforce of SMEs in Korea: 2005–2010 (unit: thousands, %).

Category 2005 2006 2007 2008 2009 2010

Number of SMEs 2864 2936 3047 3044 3066 3122

Proportion of the number of SMEs 99.9 99.9 99.9 99.9 99.9 99.9
Number of SME employees 10,449 10,678 11,343 11,468 11,751 12,263
Proportion of SME employees 87.8 87.3 88.5 87.7 87.7 86.8

Source: Adapted from Korea Federation of Small Business (2012).

Considering the importance of SMEs in the Korean economy, the
Korean governmental authorities have, for many years, carried out
a variety of programs to support these enterprises. In particular, the
Korean government has implemented various strategies for a bal-
anced regional development to decrease income disparity between
the industrial and agricultural sectors since DJ Administration’s
regime and policy initiatives promoting regional industries. As a
means of promoting regional industries, the Korean government
has invested huge amounts of public funds conducive to SME inno-
vation on the assumption that innovative SMEs may strengthen
their competitiveness in markets and make a considerable impact
on local competitiveness. This, in turn, promotes regional economic
growth. Since the Korean government has provided financial sup-
port for SME innovation in regional industries, the design and
implementation of such programs have received the increasing
attention of regional SMEs. Table 2 illustrates the total R&D invest-
ment and public R&D investment for SMEs from 2005 to 2010 in
South Korea.
The Korean governmental financial support for SME innovation
has focused on technological innovation. Technology is considered
a necessary condition for the growth of the economy (Guan et al.,
2006). Technological development is often linked with economic
progress and social benefits (DTI, 2000). Although SMEs need to
acquire technological skills and introduce new and effective tech-
nologies into their firms to promote their innovations, they are
reluctant to (or cannot) do so because many SMEs do not have
enough financial resources required to invest in or develop such
technologies (Lee et al., 2010). The profit technology brings to SMEs
is not guaranteed, and even, many SMEs do not have a sufficient
technical infrastructure to support and develop the next stage in
advanced technology. This limits the success of SMEs (Thomas,
2007). Governmental intervention, such as technological devel-
opment assistance policies for SMEs, i.e. ‘Technology Development
Assistance Fund (TDAF),’ in South Korea is required to overcome the
constraints that SMEs cannot resolve themselves. Fig. 2 describes
the financial support policy system for SMEs in South Korea.
According to Fig. 2, the part shown in dotted line is the flow of
TDAF in regional industries. Korean central government provides
the TDAF to local governments and they have offered financial sup-
port for technological innovations of regional SMEs in Korea. The
TDAF has been targeted by central government for its use for SME
innovations in regional strategic industries.
In particular, the local governments (13 metropolitan cities and
provinces) in Korea have invested in technological innovations of
regional SMEs in their regional strategic industries to promote
balanced regional development. This is why the TDAF was selected
for the study.
Government industrial policy can be divided into two cate-
gories: an application of national (central) industrial policies to
the local (regional) level, and local industrial policies for their
own regional economic prosperity. The TDAF of South Korea is a
part of national industrial policies which are distributed from the
Department of Knowledge and Economy to the local (or provin-
cial) government level. In other words, the policies included in
the former category are implemented by local level government
agencies representing central government. The objective of tech-
nological development assistance funds of government for SMEs is
enhancing the performance of SMEs through technological innova-
tion and contributing to the regional development through capacity
(or competences) strength.
The goals of local industrial policies, including technology
development assistance funds, are reducing the gap (disparity)
in economies across regions and increasing GRDP by vitalizing
local corporations, especially small and medium enterprises. Espe-
cially, the Korean government has concentrated on investments
to expand local infrastructures, growth of self-sufficient corpo-
rations through SMEs’ technological development support, and
strengthening industrial competitiveness at a local level since
1999. With the authority and funds given from the national gov-
ernment, a local government agency can initiate local industrial
policies which are classified into six parts: technological develop-
ment assistance, infrastructure building support, human resource
development, corporation support services, networking, and local
business community development. According to the Department
of Knowledge and Economy’s report, technological development
assistance, among six parts of local industrial policies, occupied
23.3% of the total investments, and the amount was at about 182
million US dollars in 2008.
In this study, we focused on the technological development
assistance policies implemented at the firm level. Cho et al. (2005)
argued that government investments in the technological develop-
ment of SMEs brought more efficiency than inefficiency originating
from crowding out effects by compensating for market failure.
Government financial assistance for technological development
increased proportion of success in technological development (Lee
and Kim, 2007). Thus, government financial assistance funds pro-
mote the innovation of SMEs. Many countries have also evolved
extensive infrastructures to support the development of technolog-
ical capability among SMEs. The performance of SMEs is a function
of intangible assets, skills and the ability of SMEs to develop

Table 2
Total R&D investment and public R&D investment for SMEs in Korea: 2005–2010.

Category 2005 2006 2007 2008 2009 2010 Annual average growth rate (%)

R&D investment for SMEs 2864 3805 4886 5820 6452 6720 18.6
(million US dollars)
Share of total (%) 18.4 21.5 24.4 26.7 27.3 24.4 –
Public R&D investment for SMEs 339 475 657 724 944 957 23.1
(million US dollars)
Share of total (%) 11.8 12.5 13.5 12.4 14.6 14.2 –

Source: Adapted from Kim (2012: 8–13). Korean Won ( ) was converted to US dollar by authors.
1562 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
Fig. 2. Financial support policy system for SMEs in South Korea.
Source: Adapted from Yi (2012) and revised by authors.
new capabilities over time (Prencipe, 1995; Lundvall, 1992). What
we have discovered in previous studies especially for develop-
ing regions like Africa is that the SMEs requires capabilities to
translate inventions into innovation (albeit most of the innova-
tions are incremental in nature) and so also convert government
financial intervention into significant developments. SMEs just
like firms of all sizes require technology capabilities (production,
maintenance and innovation) to generate incremental as well as
other innovations. Thus, it is important to support the develop-
ment of technological capability of SMEs as well as to support
innovation.
As a part of local industrial policy, local technology development
assistance funds aim to strengthen the competitiveness of local cor-
porations and the economy by supporting common technology,
core technology and fundamental technological developments.7
The common technological development is that which has poten-
tial in securing a competitive advantage in a global market in the
short term. The core technology implies an interdisciplinary that
enhances the capacity of local strategic industries and produces at a
higher value. The fundamental technological development implies
to the origin and how it is related to many corporations. The sig-
nificance of local technological development assistance policies
through financial support (or funds) is that SMEs in local areas
can get support to enhance their technological competence and
produce a better performance. According to the recent internal
documentation provided by the Department of Knowledge and
Economy of Korea, 396 local SMEs out of 521 received the new
technological development support from 2003 to 2006, through
local technological development assistance policies in nine provin-
cial areas.8 In 2009, the Department of Knowledge and Economy of
7
The results of local technology development support policies from 2004 to 2006
showed 558 patent applications, 104 patent registrations, and seventy-six research
papers listed in Science Citation Indexes.
8
For the same period, the total number of enterprises receiving technological
development assistance funds was 1258 (both local and central).
Korea reported growth in sales and employment in SMEs, and cost
savings through local technological development assistance poli-
cies as a direct achievement. It was also reported that the change
of mind about technological improvement and innovation in local
SMEs, which were located in a blind spot, was an indirect achieve-
ment.
Even though there are direct and indirect achievements to gov-
ernment support policies for SMEs as reported by the central
government of Korea, there is still much debate on assessing the
innovativeness of SMEs. Thus, potential impacts on the innovation
of regional SMEs from current, large amounts of public financial aid
and/or funds in regional industries is still needed to be analyzed. In
spite of the increasing interest in potential impacts of government
financial support on regional SME innovations, most previous stud-
ies have not focused on the innovation of regional SMEs in Korea.
Accordingly, this study examined the relationship between gov-
ernmental financial assistance and the innovation of regional SMEs,
building upon and considering the limitations of previous research.
Specifically, this study researched about how governmental, tech-
nological development assistance funds influenced the innovation
of SMEs in the regional strategic industries of Korea.
3. Research strategy
To further explore the points discussed above – i.e. that
SME innovation is positively influenced by government finan-
cial assistance – this study first tested the general hypothesis
of a positive relationship between government financial assis-
tance and the innovation of regional SMEs at the firm level. That
is, in addition to investigating the relationship between govern-
ment financial assistance and factors derived from technological
innovation approaches and knowledge capital theory, we exam-
ined government financial assistance as a driver of regional SME
innovations. Accordingly, we explored the relationship between
government financial assistance and regional SME innovations
based on various empirical models.
 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
3.1. Empirical model
To examine the impact of governmental financial assistance
on regional SME innovations, this study used multiple regression
equations, providing us with a straightforward approach for mea-
suring the impact on the technological innovation of regional SMEs.
Based on previous studies, government financial support for SMEs
is represented by the technological development assistance funds
(TDAF) in South Korea. Thus, the fund is used as a main explanatory
variable in this study. As main dependent variables, this study uses
the technological innovation of SMEs in regional strategic indus-
tries.
As measures of the innovation of SMEs, this study uses the num-
ber of patents, utility models, trademark registrations, and new
design registrations of each SME. There are several important lim-
itations to using the number of patents as an indicator of SME
innovation, such as the difference between innovation and inven-
tions (Edwards and Gordon, 1984), the inability of capturing all
of the innovations actually made (Acs and Audretsch, 2005), the
uncertainty in the propensity to register patents across firms and
across industries (Scherer, 1983), variations in the value and cost of
individual patents within and across industries (Mansfield, 1984),
and misleading comparisons both within and between industries
(Cohen and Levin, 1989). The reliability of the patent data as a mea-
sure of innovation has been challenged, although new and superior
patent data sources, such as the new computerized measures for
patented inventions by the US Patent and Trademark Office and
patent offices in Europe, have been introduced (Acs and Audretsch,
2005). Acs et al. (2002) showed that patented inventions provide a
fairly reliable, though not perfect, measure of innovation activity.
Thus, this study used patents as a measure of SME innovation.
Considering important limitations to using only the number of
patents as an indicator of SME innovation, this study also used util-
ity models, trademark registrations, and new design registrations
of each SME as a measure of SME innovation. A utility model is an
intellectual property right to inventions and is very similar to the
patent. But it usually has less stringent patentability requirements
and a shorter term (often 6–15 years) than those of patent.
Moreover, factors causing SME innovation, like firm age; firm
size; R&D resources; technology development networks with
universities, public research organizations, private research organi-
zations, and private enterprises; and the relationships of SME with
conglomerates are set as control variables. This study examined
how these main explanatory and control variables have impacted
technological SME innovations in regional strategic industry.
Hansen (1992) suggested that both firm size and firm age tend
to be inversely related to innovative output. Firm size does mat-
ter in identifying the determinants of both product and process
innovations (Lee et al., 2010; Vaona and Pianta, 2008; Audretsch
and Vivarelli, 1996). Thus, firm age and size are needed to be con-
sidered in the empirical models of the technological innovation of
regional SMEs.
R&D resources can be converted to new commercially suc-
cessful products and processes (Hansen, 1992; Von Hipple, 1978;
Allen and Fusfeld, 1975). The presence of R&D enhances innova-
tion (Bergek and Bruzelius, 2010; Kleer, 2010; Choi et al., 2009;
Clarysse et al., 2009; Love and Ashcroft, 1999). R&D resources, such
as R&D personnel and R&D expenditure, have been regarded as the
infrastructure for SME technological innovation. Thus, R&D invest-
ment in SMEs does matter in identifying the determinants of the
technological innovations of regional SMEs.
SME networks with other organizations for technological devel-
opment, in particular, have been regarded as important factors for
SME innovation in today’s knowledge-based economy (Eom and
Lee, 2010; Edwards et al., 2005; Faems et al., 2005; Link and Scott,
2005; Mowery and Sampat, 2005; Belderbos et al., 2004; George
1563
et al., 2002; Hall and Ziedonis, 2001). In this knowledge-based
economy, innovation is a social process (Doh and Acs, 2010). It is
no longer achieved by isolated individuals and is conceived as an
interactive process involving both formal and informal relation-
ships among various actors interacting through networks (Hidalgo
and Albors, 2008; Pyka, 2002; Landry et al., 2002; Kline and
Rosenberg, 1986). Moreover, technological networks (collabora-
tion and partnership) between actors in markets are important
sources of innovation.9 In particular, SMEs use external means of
innovation more than large firms, as they consider alliances as
ways to extend their technological competences (Lee et al., 2010;
Edwards et al., 2005).
SMEs and large conglomerates interact with and influence
each other on a substantial level (Lee et al., 2010; Narula, 2004;
Mangematin et al., 2003). Many SMEs become subcontracting firms
for the conglomerates, and some of them are located in the areas
nearby where the conglomerates are operating. In particular, the
relationship between the SMEs and conglomerates can be char-
acterized as more vertical than horizontal, and such a strong
network based relationship between the SMEs and conglomerates
can reduce the first stage of investment risks of SMEs in business
activities and technological innovation (Park and Kim, 2011). Emale
(2011) showed that SMEs actually benefit from large firms or con-
glomerates in a number of ways, including technology transfer,
finance, and product development. Growing use of networking by
SMEs reflects a possible catch-up of large firms (Lee et al., 2010).
Thus, the nature and level of subcontracting is a key consideration
that determines the level of participation of local SMEs in the pro-
cess of technological innovation.
To examine the impact of the technological development
assistance funds by the Korean government on regional SME inno-
vations, we used a pooled regression equation type with time-lag,
providing us with a straightforward approach to measuring the
impact on SME innovations in terms of four basic equations. Pooled
regression works similar to regular regression, except an extra
intercept or ‘dummy’ is added for each firm. This is basically an
Ordinary Least Squares (OLS) model with dummy variables to con-
trol for time differences, assuming constant slopes (coefficients) for
independent variables and constant variance across times. In this
study, year dummy variables are included in each empirical model.
p p
 p

2007
p
Patentt+2 = ˛0 + ˇ1 Fundt + ˇi Xti + ˇj YDj + εpatent (1)
j=2005
 
2007
Utilityt+2 = ˛u0 + ˇ1u Fundt + ˇiu Xti + ˇju YDj + εutility (2)
j=2005
 
2008
Trademarkt+1 = ˛tr tr
ˇitr Xti + ˇjtr YDj
0 + ˇ1 Fundt +
j=2005
+ εtrademark (3)
 
2008
Designt+1 = ˛d0 + ˇ1d Fundt + ˇid Xti + ˇjd YDj + εdesign (4)
j=2005
9
Social capital theorists argue that innovation is no longer explained by the sole
combinations of tangible forms of capital, such as physical, financial, etc., but instead
by combinations of intangible forms of capital, such as social capital in the knowl-
edge economy (Doh and Acs, 2010; Landry et al., 2002). Thus, it can be said that basic
R&D, combinations of tangible forms of capital (i.e. physical capital) in conjunction
with intangible forms of capital (i.e. social capital), and technological networks (col-
laboration and partnership) between actors in markets are important sources of
innovation.
1564 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
In these models, Patent represents the number of patent
registrations, Utility represents the number of utility model
registrations, Trademark represents the number of trademark regis-
trations, Design represents the number of new design registrations,
˛ represents the constant, ˇ represents the coefficient of each vari-
able, Fund represents the technology development assistance fund,
X represents the control variables vector, and YD represents the
year dummy variable vector. Subscript i represents particular SMEs,
t represents year, and ε is the random error term.
3.2. Data and variables
This study used micro panel data and survey data for the empir-
ical analysis at the firm level. The data on regional SMEs in the
Gyeongbuk province was mainly collected by questionnaire. In the
Gyeongbuk province in Korea, there are four strategic industries:
electronic information devices, parts made of advanced materi-
als, bio-oriental medicine, and culture tourism industries. These
regional strategic industries are core industries and therefore they
are very important industries in today’s Korean economy. This is
one of the reasons why we selected the Gyeongbuk province as the
scope and range of our study. The other reason is that we could not
access the database on other provinces and cities because of data
unavailability.
Local authority of the Gyeongbuk province has offered financial
support with the TDAF for technological innovations of regional
SMEs in the three strategic industries excepting for culture tourism
industry since 1999. We collected survey data by ourselves and a
person in charge of work on the TDAF in the Gyeongbuk province
helped us to collect the data. The person provided us a lot of infor-
mation on the TDAF in the Gyeongbuk province. Regarding the
data on technological innovations (i.e. patent, utility model, trade-
mark, new design registrations) of regional SMEs in the Gyeongbuk
province, the responses of 47 regional SMEs were identified form
the Korea Intellectual Property Rights Information Service web site
and then followed up by survey. Also, most firms provided sensitive
data on their characteristics and business for 6 consecutive years
because the TDAF manager tried to his best to enlighten regional
SMEs about our research background.
Specifically, other data on regional SMEs was from the Min-
istry of Knowledge Economy, the NICE credit information service
website, and out survey. As previously mentioned, firm age, firm
size, R&D personnel, networks for technology innovation, and rela-
tionships with conglomerates are related with the technological
innovation of regional SMEs. Thus, this study considered these
factors in an analytical model of the technological innovation of
regional SMEs.
First, as an indicator of governmental financial support for
regional SME technological innovations, this study used the TDAF
for regional SMEs provided by the Korean government in the
Gyeongbuk province from 2004 to 2009. The Korean government
started to support regional SMEs with the technological develop-
ment assistance fund in 2003. Because of data availability, this study
used the technological development assistance fund (TDAF) data
provided by the Ministry of Knowledge Economy of South Korea
from 2004 to 2009. The technological development assistance fund
(TDAF) was measured as the total amount of TDAF from 2004 to
2009.
Second, indicators for the control variables were drawn from a
variety of sources, as described in this paper. The authors of this
study also conducted a survey of regional SMEs which are from
the technological development assistance fund from August 1st
to September 2nd, 2010, to collect data on other indicators which
were not covered by the Ministry of Knowledge Economy of South
Korea.
• Firm age is expressed as how long each SME has been in business
since the firm’s start-up.
• Firm size is expressed as the natural log value of the total gross
per employee per year.
• The variable, R&D personnel is measured as the number of
researchers in R&D of each SME. R&D expenditure of each SME
is expressed as the annual total R&D expenditure for each SME
from 2004 to 2009. R&D personnel and R&D expenditures are
SMEs’ technological development infrastructure.
• Networks for technology development is measured as the num-
ber of technological development networks with universities,
the number of technological development networks with public
research organizations, the number of technological develop-
ment networks with private research organizations, and the
number of technological development networks with private
enterprises.
• Relationship with conglomerates is expressed as the relationship
between SME and large firms and is measured as to whether a
SME is a subcontractor with conglomerates or not.
Table 3 summarizes the indicators that measure the technolog-
ical innovation of regional SMEs, governmental financial support,
and the control variables. It also presents a brief description and
the data sources of each variable.
4. Results and discussions
4.1. Descriptive statistics
Before exploring the relationship between government finan-
cial support and the technology innovation of regional SMEs using
pooled regression analysis, descriptive statistics regarding the firm-
level characteristics of each SME will be discussed. Table 4 presents
descriptive statistics regarding characteristics of all SMEs per year.
Table 4 shows increasing mean total amount of technologi-
cal development assistance funds for each SME from 2004 (about
$19,000) to 2009 (about $117,000). Technological innovation
measured as the number of patents, utility models, trademark
registrations, and new design registrations of each regional SME
also increased from 2004 to 2009. The mean number of patents was
the highest among the number of patents, utility models, and new
design registrations. Infrastructure for technological development
measured as the number of researchers of each SME increased, and
the number of networks for technology development also increased
from 2004 to 2009. In terms of the relationship between SME and
conglomerates, 40% of SMEs were subcontractors with conglomer-
ates. To understand how much of the technological innovations of
SMEs come from the total amount of fund (TDAF) and how much
come from the other characteristics of SMEs, it is necessary to con-
duct a regression analysis with dependent and control variables.
4.2. Regression results
As previously mentioned, we followed convention and used
patent, utility model, trademark, and new design registrations as
the overall measure of regional SME innovations in the Gyeongbuk
province of South Korea. Technological innovation was measured
as the number of patent registration, the number of utility model
registrations, the number of trademark registrations, and the num-
ber of new design registrations of each SME. The results from the
four equations and the four related variations modeling technolog-
ical innovation are shown in Table 5.
According to Table 5, indicators of SME’s technological innova-
tions, such as patents and new design registrations, are positively
related to the main explanatory variable (the total amount of fund,
 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569 1565

Table 3
A brief description of variables and data sources.

Variables Brief description Data sources

Dependent variables
Independent variables
Controlling variables
a
This survey was conducted by the authors of this study from August 1st to September 2nd, 2010.
Technological • Patent registrations The number of patents per year Korea Intellectual
innovation of SMEs • Utility model registrations The number of utility models per year Property Rights
• Trademark registrations The number of trademark registrations per Information Service
year website
• New design registrations The number of new design registrations per (www.kipris.or.kr)
year
Total amount of funds Total amount of technology development assistance funds for each SME Ministry of Knowledge
per year Economy website
(unit: 1000 US$) (www.mke.go.kr)
Firm age How long the firm has been in
Survey (2010)a
business (from the date of
founding) (unit: year)
Firm age2 Firm age × Firm age
Firm size Natural log value of total gross per employee (unit: US$) per year Survey (2010)a ,
financial statement of
each SME
R&D personnel The number of researchers in R&D Nice Information
R&D expenditures Annual R&D expenditure for each SME (unit: US$) Service website
The number of technological development networks with universities (www.kisinfo.com),
Networks for Survey (2010)a ,
The number of technological development networks with public research
technological
organizations Financial Statement of
development Each SME
The number of technological development networks with private research
organizations
Survey (2010)a
The number of technological development networks with private
enterprises
Relationship with Subcontractors 1 = Subcontractors with conglomerates
conglomerates 0 = Other
Year 2005 1 = year 2005; 0 = other
Year 2006 1 = year 2006; 0 = other
Year dummy Year 2007 1 = year 2007; 0 = other
Year 2008 1 = year 2008; 0 = other
Year 2009 1 = year 2009; 0 = other

TDAF). In other words, the positive and statistically significant coef- development assistance funds increase, the number of patents
ficient of technological development assistance funds at the 95% and new design registrations will also increase, as we originally
level in Table 5 points to a positive relationship to technological expected. However, the total amount of TDAF is not associated to
innovation of regional SMEs. As the total amount of technology the utility model and trademark registrations. The coefficients of

Table 4
Descriptive statistics.

Variables Cases 2004 2005 2006 2007 2008 2009

Mean Mean Mean Mean Mean Mean
(S.D.) (S.D.) (S.D.) (S.D.) (S.D.) (S.D.)

Patent 47 0.2 0.3 0.4 0.8 1.1 1.5

registrations (0.48) (1.00) (0.58) (1.42) (1.97) (4.12)
Utility model registrations 47 0.085 0.10 0.06 0.17 0.19 0.27
(0.35) (0.37) (0.24) (0.48) (0.64) (0.53)
Trademark 47 0.085 0.12 0.06 0.085 0.19 0.12
registrations (0.35) (0.33) (0.32) (0.35) (0.57) (0.61)
New design registrations 47 0.085 0.085 0.085 0.34 0.46 0.46
(0.28) (0.45) (0.35) (0.93) (1.23) (0.80)
Total amount of funds 47 19.2 34.1 91.2 88.1 60.3 116.6
(TDAF) (66.71) (76.54) (162.77) (156.99) (132.01) (329.90)
Firm age 47 6.23 7.23 8.23 9.23 10.23 11.23
(6.63) (6.63) (6.63) (6.63) (6.63) (6.63)
Firm size 47 11.43 11.53 11.55 11.53 11.59 11.55
(0.71) (0.71) (0.65) (0.65) (0.68) (0.65)
R&D personnel 47 3.0 3.6 4.4 5.5 6.3 6.9
(5.21) (5.24) (6.78) (7.92) (8.43) (8.80)
R&D expenditures 47 84.9 139.8 169 248.7 277.2 324.9
(212.57) (286.56) (341.9) (471.9) (467.0) (498.8)
Networks with universities 47 0.3 0.4 0.5 0.7 0.8 1.1
(0.49) (0.57) (0.62) (0.86) (0.99) (1.56)
Networks with public research organizations 47 0.1 0.2 0.2 0.5 0.7 0.9
(0.37) (0.45) (0.48) (0.86) (1.05) (1.21)
Networks with private research organizations 47 0.0 0.0 0.1 0.1 0.1 0.1
(0.15) (0.20) (0.25) (0.25) (0.25) (0.47)
Networks with private enterprises 47 0.3 0.2 0.3 0.3 0.4 0.6
(0.61) (0.55) (0.78) (0.79) (0.92) (1.25)
Relationship with conglomerates 47 0.4 0.4 0.4 0.4 0.4 0.4
(0.50) (0.50) (0.50) (0.50) (0.50) (0.50)

Note: S.D. means “standard deviation.”

1566 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569

Table 5
Regression results: technological innovation of SMEs.

Variables Patent Utility model Trademark New design

registrations (t + 2) registrations (t + 2) registrations (t + 1) registrations (t + 1)

Coefficient t-Value Coefficient t-Value Coefficient t-Value Coefficient t-Value

Total amount of fund (TDAF) 0.00640*** 4.96 0.00034 1.05 −0.00009 −0.33 0.00105** 2.28
Firm age 0.05965 0.82 −0.00866 −0.47 −0.00606 −0.39 0.01481 0.56
Firm age2 −0.00659** −2.20 −0.00038 −0.51 0.00044 0.74 −0.00104 −1.01
Firm size 0.56519** 2.20 −0.01307 −0.20 0.00321 0.06 0.11232 1.22
R&D personnel 0.00066 0.02 0.02564*** 2.94 −0.01242* −1.79 −0.01036 −0.87
R&D expenditures 0.00206*** 3.19 0.00002 0.13 0.00007 0.58 0.00037* 1.84
Networks with universities 1.30507*** 5.09 0.05669 0.88 0.09104* 1.80 0.29139*** 3.37
Networks with public research organizations −0.29893 −0.88 −0.10768 −1.27 0.05709 0.95 −0.02898 −0.28
Networks with private research organizations 0.47116 0.66 0.06066 0.34 0.07256 0.50 0.17326 0.70
Networks with private enterprises −0.41429 −1.28 −0.06471 −0.79 0.01242 0.20 −0.09625 −0.91
Relationship with conglomerates −0.16201 −0.63 0.02882 0.44 −0.06004 −1.14 0.06392 0.71
Year 2005 −0.00692 0.02 0.09586 0.92 −0.07764 −0.81 −0.07557 −0.46
Year 2006 −0.28144 −0.66 0.09472 0.88 −0.06382 −0.65 0.08023 0.48
Year 2007 −0.06446 −0.14 0.18753 1.65 0.01744 0.17 0.15950 0.91
Year 2008 – – – – −0.07097 −0.67 0.15461 0.85
Constant −6.28851** −2.22 0.21356 0.30 0.12660 0.21 −1.31266 −1.29

R2 0.3906 0.1052 0.0583 0.4974

F-value 7.87*** 1.44 0.90 15.48***
Cases 187 187 234 234

*p ≤ 0.1, **p ≤ 0.05, ***p ≤ 0.01, two-tailed tests; t = year 2004; coefficient is unstandardized coefficient, b not beta value.

the total amount of TDAF in the regression results on the utility
model and trademark registrations are not statistically significant.
These results suggest that changes in the patent and new design
registrations of regional SMEs appear to be caused by the govern-
ment financial support.
Also the estimates of the coefficients of the “control variables”
provide interesting indications. Firm size measured as the total
gross per employee is positively related to patent registrations of
regional SMEs and the relationship is statistically significant at the
95% level. This result reflects the fact that the number of patent
registrations of larger firms (when measured the total gross per
employee) are on average higher than those characterizing smaller
firms among regional SMEs.
On the one hand, the number of R&D personnel (researchers)
is positively related to the utility model acquisitions of regional
SMEs, and the relationship is statistically significant at the 99% level.
However, the number of R&D personnel is negatively related to the
trademark registrations. On the other hand, annual R&D expend-
itures of each SME are positively related to patent registrations
of regional SMEs. And, the relationship is statistically significant
at the 99% level. Also, there is a positive impact of R&D expend-
itures on new design registrations of regional SMEs. This means
that the regional SMEs that have a high R&D expenditure tend to
find that the impact of R&D expenditure is positive and even might
promote their new design registrations. But, the impacts of R&D
expenditures on utility model and trademark registration are not
statistically significant. Thus, the impacts of the R&D infrastructure
are inconsistent in this study and are in line with that of previous
studies suggesting that there is still much debate on assessing the
innovativeness of SMEs because of their material or resource factor
disadvantages (Lee et al., 2010; Audretsch and Vivarelli, 1996).
We also looked at the relationships between SME networks with
four different entities and technological innovations of regional
SMEs. Among SME networks with four different entities, SME
networking with universities is positively related to patent acqui-
sitions, trademark registrations, and new design registrations of
regional SMEs. This result implies that SME networks with univer-
sities promote and contribute to technological innovation of SMEs
in terms of patent, trademark, and new design registrations. The
results on the impacts of SME networking with universities in this
study are in line with those of many previous studies (i.e. Eom and
Lee, 2010; Santoro and Chakrabarti, 2002; Schartinger et al., 2002;
Meyer-Krahmer and Schmoch, 1998; Geisler, 1995).
Finally, SME relationship with conglomerates is not related to
the indicators of technological innovations. This is not in line with
many previous studies (i.e. Edwards et al., 2005; Faems et al., 2005;
Link and Scott, 2005; Mowery and Sampat, 2005; Belderbos et al.,
2004; George et al., 2002; Hall and Ziedonis, 2001). It is difficult to
explain why the SME relationship with conglomerates is not statis-
tically significant. But it can be said that the results might be caused
by the fact that this study used different data and time period from
those of previous studies.
All in all the findings of the estimates presented in Table 5
convey four major messages. The first one is that governmental
financial support for technological innovations is important driver
in the patent and new design registrations of regional SMEs. The
second finding is that the SME network with university is an effec-
tive strategy other than networks with the other organizations.
The third message is that R&D resources of regional SMEs, such
as R&D expenditures, are also important factors in the technolog-
ical innovations of SMEs. The final one is that we need to adopt
more sophisticated innovation models to analyze the impact of
the governmental financial support on utility model and trademark
registrations of regional SMEs. In other words technological innova-
tion models in the regional strategic industries seem to require the
adoption of a more systemic approach to technological innovations
measured as utility model and trademark registrations.
5. Conclusion and implications for future research
This study explored the impact of government financial sup-
port on the technological innovations of regional SMEs in the
Gyeongbuk province, South Korea. The research presented here
provided supportive evidence and raised theoretical and empir-
ical questions for linking government financial support for the
technological innovations of regional SMEs beyond such issues
raised in other approaches. The findings suggested that government
financial support plays an important role in generating the techno-
logical innovations of regional SMEs. In other words, results from
pooled regression models indicated that there is a positive relation-
ship between technology development assistance funds of Korean
 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
government and the patent acquisitions of regional SMEs. Results
also showed that there is a positive relationship between techno-
logical development assistance funds and new design registrations
of regional SMEs. In other words, the regional SMEs with more pub-
lic funds for technological development have a higher number of
new design registrations. In terms of networks for technological
development, SME’s networks with universities have an influence
on regional SME’s patents acquisitions and new design registra-
tions. But we need to consider that all the findings of the estimates
presented in this study are valid only in the case of Gyeongbuk
province. To make generalizations about the impact of govern-
ment financial support on technological innovations of regional
SMEs, we need to consider the analysis based on SME database
in 13 metropolitan cities and provinces, South Korea in the future
research.
As comparing our findings with the recent literature on techno-
logical innovations of firms in South Korea (i.e. Yi, 2012; Lee et al.,
2010; Eom and Lee, 2010; Choi et al., 2009), one of the major con-
tributions of this study was in linking technological development
assistance of central and local governments to technological inno-
vation of regional SMEs in regional strategic industries. Another
major contribution of the study was in exploring the impact of the
technological networks of SMEs with outside organizations, such
as universities, on the technological innovation of regional SMEs.
Overall, the following suggestions are presented, which are
based on the results of this study. First, technological development
assistance plans should be divided by the stage of technological
development, and the assistance plan should be differentiated so
as to best use the necessity of the stage of technology, because inno-
vation occurs in many forms and comprises many different stages
or processes.
In addition, regional SME technological innovation perform-
ances, which are supported by the technological development
financial support, can be mainly drawn from universities. Hence,
it is necessary to divide a technological phase that is the object
of technological development into two phases: an original tech-
nology and a product development technology. In case of the
original technology, for the first step, SME’s technological devel-
opment networks with universities can play a leading role in the
original technological innovations. In addition, there should be
modifications on the assistance systems to allow the product devel-
opment technological assistance only for SME innovations which
had already developed original technology.
Finally, regional SMEs should secure fundamental R&D
resources for the qualification of government financial support
policies in order to maximize the effects of the policies because the
number of R&D researchers and expenditures of regional SMEs have
a close relationship with the technological innovation of regional
SMEs in regional strategic industries.
As one of limitations, this study could not consider adopting
the net present value approach. Since the model includes financial
data, i.e. government funding, R&D expenditures, for 6 consecu-
tive years plus 2 lag years. This may be quite a considerably long
period of time. Thus, future study needs to consider adopting the
net present value of each variables. Another limitation is that this
study fails to adopt more sophisticated innovation models to ana-
lyze the impact of the governmental financial support on utility
model and trademark registrations of regional SMEs. Thus, the R2
values are just too small for utility model and trademark regis-
trations. Thus, it is necessary to adopt a more systemic approach
to technological innovations measured as utility model and trade-
mark registrations in the future research. The third limitation is that
the dependent variables used in this study are zero in many cases.
In this case, it is possible that there is a high level of error of the
regression model. Thus, if possible, it is necessary to use a panel
data with a long time period and lots of cases at the firm level
1567
in regional strategic industries, South Korea in the future study.
To support the research findings and conclusion, this study tried
to interview with practitioners and got some useful opinions on
the impact of governmental financial support on the technologi-
cal innovations in the regional strategic industries. According to
the interviews with government financial support practitioners and
members of regional SMEs in Gyeongbuk province, the technology
development assistance funds of government for regional SMEs,
is very useful for technological innovations of regional SMEs, espe-
cially, for patent acquisitions of regional SMEs. In addition, they said
that the SMEs’ networks with university are very effective strategy
other than networks with the other organizations on technological
innovations of regional SMEs. But, they brought up a problem that
the entry barrier to get the TDAF is so high. Thus, local government
needs to introduce a more sophisticated system to lower the barrier
to entry.
For future consideration, more research is also needed on the
issue of the regional strategic industry areas, such as biotechnology,
information and communication technology, chemical technol-
ogy, new material development technology, etc. In addition, more
research on regional SME social networks with other organizations
is needed to explore the role of SME networks in technological
innovation, because innovation is a process involving social interac-
tion in this knowledge-based economy. Innovation is an interactive
process involving both formal and informal relationships between
firms and organizations involving various actors interacting within
networks. Thus, the relationship between governmental financial
support and technological innovation of SMEs in regional industries
is clarified.
References
Acs, Z.J., 2006. How is entrepreneurship good for economic growth. Innovations 1
(1), 97–107.
Acs, Z.J., Anselin, L., Varga, A., 2002. Patents and innovation counts as measures of
regional production of new knowledge. Research Policy 31, 1069–1085.
Acs, Z.J., Audretsch, D.B., Braunerhjelm, P., Carlsson, B., 2004. The Missing Link: The
Knowledge Filter Entrepreneurship and Endogenous Growth. Center for Eco-
nomic Policy Research Discussion Papers No. 4783. CEPR, London.
Acs, Z.J., Audretsch, D.B., Feldman, M.P., 1994. R&D spillovers and recipient firm size.
Review of Economics and Statistics 76 (2), 336–339.
Acs, Z.J., Audretsch, D.B., 2005. Entrepreneurship, innovation and technological
change. Foundations and Trends in Entrepreneurship 1 (5), 1–65.
Acs, Z.J., Audretsch, D.B., 1990. Innovation and Small Firms. MIT Press, Cambridge,
MA.
Acs, Z.J., Audretsch, D.B., 1988. Innovation in large and small firms: an empirical
analysis. The American Economic Review 78 (4), 678–690.
Acs, Z.J., Audretsch, D.B., 1987. Innovation, market structure and firm size. Review
of Economics and Statistics 69, 567–575.
Allen, T.J., Fusfeld, A.R., 1975. Research laboratory architecture and the structuring
of communications. R&D Management 5 (2), 153–164.
Antonucci, T., Pianta, M., 2002. The employment effects of product and process inno-
vations in Europe. International Review of Applied Economics 16 (3), 295–308.
Audretsch, D.B., 2002. The dynamic role of small firms: evidence from the United
States. Small Business Economics 18, 13–40.
Audretsch, D.B., 2001. Research issues relating to structure, competition, and per-
formance of small technology-based firms. Small Business Economics 16 (1),
37–51.
Audretsch, D.B., Keilbach, M.C., 2004. Entrepreneurial Capital and Economic Perfor-
mance, Discussion Papers on Entrepreneurship, Growth and Public Policy. Max
Plank Institute, Jena, Germany.
Audretsch, D.B., Mata, J., 1995. The post-entry performance of firms: introduction.
International Journal of Industrial Organization 13, 413–419.
Audretsch, D.B., Thurik, A.R., 2001. Linking Entrepreneurship to Growth. STI Working
Paper 2001/2. OECD, Paris.
Audretsch, D., Vivarelli, M., 1996. Firm size and R&D spillovers: evidence from Italy.
Small Business Economics 8, 249–258.
Belderbos, R., Carree, M., Lokshin, B., 2004. Cooperative R&D and firm performance.
Research Policy 33 (10), 1477–1492.
Bennett, R., 2008. SME policy support in Britain since the 1990s: what have we
learnt? Environment and Planning C: Government and Policy 26 (2), 375–397.
Bergek, A., Bruzelius, M., 2010. Are patents with multiple investors from different
countries a good indicator of international R&D collaboration? The case of ABB.
Research Policy 39 (10), 1321–1334.
1568 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
Berry, A., 2002. The role of the small and medium enterprise sector in Latin Amer-
ica and similar developing economies. Seton Hall Journal of Diplomacy and
International Relations Winter/Spring, 104–119.
Baumol, W.J., 2004. Entrepreneurial enterprises, large established firms and other
components of the free-market growth machine. Small Business Economics 23,
9–21.
Baumol, W.J., 2002. The free-market innovation machine: analyzing the growth
miracle of capitalism. Princeton University Press, Princeton, NJ.
Burke, A.E., To, T., 2001. Can reduced entry barriers worsen market performance?
A model of employee entry. International Journal of Industrial Organization 19
(5), 695–704.
Bound, J., Cummins, C., Griliches, Z., Hall, B.H., Jaffe, A., 1984. Who does R&D and
who patents. In: Griliches, Z. (Ed.), R&D Patents and Productivity. University of
Chicago Press for the NBER, Chicago.
Chandler, A., 1977. The Visible Hand: The Managerial Revolution in American Busi-
ness. Harvard University Press, Cambridge, MA.
Cho, Y., Kim, W., Nam, J., Oh, J., 2005. Policy Directions to Improve the Efficiency of
the R&D Investment for Reinforcing the Innovative Capability. Research Report
503. Korea Institute for Industrial Economics & Trade, Seoul, Korea.
Choi, J.Y., Lee, J.H., Sohn, S.Y., 2009. Impact analysis for national R&D funding in
science and technology using quantification method II. Research Policy 38 (10),
1534–1544.
Clarysse, B., Wright, M., Mustar, P., 2009. Behavioural additionality of R&D subsidies:
a learning perspective. Research Policy 38 (10), 1517–1533.
Cohen, W.M., Levin, R.C., 1989. Empirical studies of innovation and market structure.
In: Schmalensee, R., Willig, R. (Eds.), Handbook of Industrial Organization, vol.
II. North-Holland, Amsterdam, pp. 1059–1107.
Grossman, G.M., Helpman, E., 1994. Endogenous innovation in the theory of growth.
Journal of Economic Perspectives 8 (1), 23–44.
Daft, R.L., 1991. Management. Dryden Press, Chicago, IL.
De Jong, J.P.J., Marsili, O., 2006. The fruit flies of innovations: a taxonomy of innova-
tive small firms. Research Policy 35, 213–229.
DTI (Department of Trade and Industry), 2000. Excellence and Opportunity: A Sci-
ence and Innovation Policy for the 21st Century. Stationery Office Books, London.
Doh, S., Acs, Z.J., 2010. Innovation and social capital: a cross-country investigation.
Industry and Innovation 17 (3), 241–262.
Edwards, K., Gordon, T., 1984. Characterization of Innovations Introduced on the
US Market in 1982, Prepared for the US Small Business Administration under
Contract No. SBA-6050-OA82. The Futures Group, Washington, DC.
Edwards, T., Delbridge, R., Munday, M., 2005. Understanding innovations in
small and medium-sized enterprises: a process manifest. Technovation 25,
1119–1120.
Emale, J.M., 2011. An Examination of How Conglomerates Impact Small-Medium
enterprises in Their Relationship. Proquest, Umi Dissertation Publishing,
Cambridge.
Eom, B.Y., Lee, K., 2010. Determinants of industry–academy linkages and their
impact on firm performance: the case of Korea as a latecomer in knowledge
industrialization. Research Policy 39 (5), 625–639.
Faems, D., Van Looy, B., Debackere, K., 2005. Interorganizational collaboration and
innovation: toward a portfolio approach. Journal of Production Innovation Man-
agement 22, 238–250.
Galbraith, J.K., 1956. American Capitalism: The Concept of Countervailing Power.
Houghton Mifflin, Boston, MA.
Geisler, E., 1995. Industry–university technology cooperation: a theory of interorga-
nizational relationships. Technology Analysis and Strategic Management 7 (2),
217–229.
George, G., Zahra, S.A., Wood, D.R., 2002. The effects of business–university
alliances on innovative output and financial performance: a study of pub-
licly traded biotechnology companies. Journal of Business Venturing 17,
577–609.
Gregory, G., Harvie, C., Lee, H.H., 2002. Korean SMEs in the 21st century: strate-
gies, constraints and performance in a global economy. Economic Papers 21 (3),
64–79.
Guan, C., Mok, K., Yam, M., 2006. Technology transfer and innovation performance:
evidence from Chinese firms. Technological Forecasting and Social Change 73,
666–678.
Hall, B.H., Ziedonis, R.H., 2001. The patent paradox revisited: an empirical study
of patenting in the U.S. semiconductor industry, 1979–1995. RAND Journal of
Economics 32, 101–128.
Hall, C., Harvie, C., 2003. A Comparison of the Performance of SMEs in Korea and
Taiwan: Policy Implications for Turbulent Times, Economic Working Paper
Series 03-05. University of Wollongong, New South Wales, Australia.
Hansen, J.A., 1992. Innovation, firm size, and firm age. Small Business Economics 4
(1), 37–44.
Hidalgo, A., Albors, J., 2008. Innovation management techniques and tools: a review
from theory and practice. R&D Management 38 (2), 113–127.
ILO (International Labour Organization), 2001. Life at Work in the Information Econ-
omy. ILO, Geneva.
Jones, O., Tilley, F. (Eds.), 2003. Competitive Advantage in SMEs: Organizing for
Innovation and Change. Wiley, Chichester.
Kirzner, I.M., 1997. Entrepreneurial discovery and the competitive market process:
an Austrian approach. Journal of Economic Literature 35 (1), 60–85.
Kim, Y.H., 2012. The R&D Investment for SMEs to Promote Sustainable Economic
Growth in Korea: The Present Situation and Implications, KISTEP Issue Paper
2012-03. Korea Institute of Science & Technology Evaluation and Planning, Seoul,
Korea (in Korean).
Kleer, R., 2010. Government R&D subsidies as a signal for private investors. Research
Policy 39 (10), 1361–1374.
Kline, S.J., Rosenberg, N., 1986. An overview of innovation. In: Landau, R., Rosen-
berg, N. (Eds.), The Positive Sum Strategy: Harnessing Technology for Economic
Growth. National Academy Press, Washington, DC, pp. 275–305.
Korea Federation of Small Business, 2012. Korean SME Statistics 2012. Korea Feder-
ation of Small Business, Seoul, Korea.
Kramer, W.J., Jenkins, B., Katz, R.S., 2007. The Role of the Information and Com-
munications Technology Sector in Expanding Economic Opportunity, Corporate
Social Responsibility Initiative Report No. 22. Kennedy School of Government,
Harvard University, Cambridge, MA.
Laforet, S., Tann, J., 2006. Innovative characteristics of small manufacturing firms.
Journal of Small Business and Enterprise Development 13 (3), 363–380.
Landry, R., Amara, N., Lamari, M., 2002. Does social capital determine innovation?
To what extent? Technological Forecasting and Social Change 69 (7), 681–701.
Laursen, K., Salter, A.J., 2004. Searching high and low: what type of firms use uni-
versities as a source of innovation? Research Policy 33 (8), 1201–1215.
Lee, J., Kim, C., 2007. The econometric evaluation of the impact of R&D incentive on
technological outcomes. Journal of Korea Technology Innovation Society 10 (1),
1–21.
Lee, S.J., Park, G.M., Yoon, B.G., Park, J.W., 2010. Open innovation in SMEs: an inter-
mediated network model. Research Policy 39 (2), 290–300.
Liesch, P., Knight, G., 1999. Information internalization and hurdle rates in SME
internationalization. Journal of International Business Studies 30 (1), 383–394.
Link, A.N., Bozeman, B., 1991. Innovation behavior in small-sized firms. Small Busi-
ness Economics 3 (3), 179–184.
Link, A.N., Scott, J.T., 2005. Opening the Ivory Tower’s door: an analysis of the deter-
minants of the formation of U.S. university spin-off companies. Research Policy
34 (7), 1106–1112.
Love, J.H., Ashcroft, B., 1999. Market versus corporate structure in plant-level inno-
vation performance. Small Business Economics 13 (2), 97–109.
Lundvall, B., 1992. National Systems of Innovation: Towards a Theory of Innovation
and Interactive Learning. Pinter, London.
Mangematin, V., Lemarie, S., Boissin, J.P., Catherine, D., Corolleur, F., Corolini, R.,
Trommetter, M., 2003. Development of SMEs and heterogeneity of trajecto-
ries: the case of biotechnology in biotechnology firms. Research Policy 32,
737–750.
Mansfield, E., 1984. Comment on using linked patent and R&D data to measure
interindustry technology flows. In: Griliches, Z. (Ed.), R&D, Patents, and Pro-
ductivity. University of Chicago Press, Chicago, pp. 462–464.
Maula, M.V.J., Keil, T., Salmenkaita, J.P., 2006. Open innovation in systemic inno-
vation context. In: Chesbrough, H., Vanhaverbeke, W., West, J. (Eds.), Open
Innovation: Researching a New Paradigm. Oxford University Press, NY.
McIntyre, R., 2001. The Role of Small and Medium Enterprises in Transition:
Growth and Entrepreneurship. UNU World Institute for Development Eco-
nomics Research, Helsinki.
Meyer-Krahmer, F., Schmoch, U., 1998. Science-based technology:
university–industry interactions in four fields. Research Policy 27 (8),
835–851.
Mowery, D.C., Sampat, B.N., 2005. The Bayh–Dole Act of 1980 and
university–industry technology transfer: a model for other OECD government.
Journal of Technology Transfer 30, 115–127.
Narula, R., 2004. R&D collaboration by SMEs: new opportunities and limitations in
the face of globalisation. Technovation 25, 153–161.
Nugent, J.B., Yhee, S., 2002. Small and medium enterprises in Korea: achievements,
constraints and policy issues. Small Business Economics 18 (1–3), 85–119.
OECD, 2011. R&D Statistics. OECD, Paris.
OECD, 2004a. Effective Policies for Small Business: A Guide for the Policy Review Pro-
cess and Strategic Plans for Micro, Small and Medium Enterprise Development.
OECD, Paris.
OECD, 2004b. Promoting SMEs for Development: The Enabling Environment
and Trade and Investment Capacity Building. OECD, Paris http://www.oecd.
org/dataoecd/6/7/31919278.pdf
OECD, 2004c. Small and Medium-sized Enterprises in Turkey: Issues and Policies.
OECD, Paris http://www.oecd.org/dataoecd/5/11/31932173.pdf
OECD, 2000. Small and Medium-Sized Enterprises: Local Strength, Global Reach.
Policy Brief June 2000. OECD, Paris.
Park, S., Kim, S., 2011. South Korean SME’s entrepreneurship in the globalizing eco-
nomic system focused on Yuyang DNU. In: Paper prepared for the 56th Annual
ICSB World Conference on Changes in Perspectives of Global Entrepreneur-
ship and Innovation, Stockholm, Sweden, 15–18 June http://www.icsb2011.org/
download/18.62efe22412f41132d41800011448/119.pdf
Pianta, M., 2001. Innovation, demand and employment. In: Petit, P., Soete, L. (Eds.),
Technology and the Future of European Employment. Elgar, Cheltenham, pp.
142–165.
Prencipe, A., (MSc Thesis) 1995. Technological Competencies in the Jet Engine Indus-
try: The Case of Rolls-Royce PLC. Science Policy Research Unit, Brighton.
Pyka, A., 2002. Innovation networks in economics: from the incentive-based to the
knowledge-based approaches. European Journal of Innovation Management 5
(3), 152–163.
Rogers, M., 2004. Networks, firm size and innovation. Small Business Economics 22,
141–153.
Rothwell, R., 1989. Small firms, innovation and industrial change. Small Business
Economics 1 (1), 51–64.
Rothwell, R., Dodgson, M., 1994. Innovation and size of firm. In: Dodgson, M. (Ed.),
Handbook of Industrial Innovation. Edward Elgar, Aldershot, pp. 310–324.
 S. Doh, B. Kim / Research Policy 43 (2014) 1557–1569
Santoro, M.D., Chakrabarti, A.K., 2002. Firm size and technology centrality in
industry–university interactions. Research Policy 31, 1163–1180.
Schartinger, D., Rammer, C., Fischer, M.M., Frohlich, J., 2002. Knowledge interactions
between universities and industry in Austria: sectoral patterns and determi-
nants. Research Policy 31, 303–328.
Scherer, F.M., 1991. Changing perspectives on the firm size problem. In: Acs, Z.J.,
Audretsch, D.B. (Eds.), Innovation and Technological Change: An International
Comparison. University of Michigan Press, Ann Arbor, MI, pp. 24–38.
Scherer, F.M., 1983. The propensity to patent. International Journal of Industrial
Organization 1 (1), 107–128.
Schumpeter, J.A., 1942. Capitalism, Socialism and Democracy. Harper and Row, New
York.
Shane, S., 2000. Prior knowledge and the discovery of entrepreneurial opportunities.
Organization Science 11 (4), 448–469.
Thomas, A.J., 2007. Creating sustainable small and medium enterprises through
technological innovation. Journal of Engineering Manufacture 17, 513–528.
1569
Vaona, A., Pianta, M., 2008. Firm size and innovation in European manufacturing.
Small Business Economics 30 (3), 283–299.
Von Hipple, E., 1978. A consumer active paradigm for industrial product idea gen-
eration. Research Policy 7 (3), 240–266.
Wagner, E., Hansen, E., 2005. Innovation in large versus small companies:
insights from the US wood products industry. Management Decision 42 (6),
837–850.
Wilson, K., 2007. Encouraging the internationalisation of SMEs. In: Potter, J., Proto,
A. (Eds.), Promoting Entrepreneurship in South East Europe: Policies and Tools.
OECD, Paris, pp. 43–66.
Yi, J.G.,2012. Towards a better framework for supply of funds in Asian financial
markets: lessons from Korea. In: Paper for International Conference on Asian
Market Integration and Financial Innovation. Financial Services Agency, Japan,
http://www.fsa.go.jp/inter/etc/201202 intl conf/eng materials/s2-4b.pdf
(07.01.13).