The Effect of Government Subsidy on Non-Technological Innovation and Firm Performance in the Service Sector: Evidence from Germany

Background: To enhance the innovation activities at the firm level, government subsidies plays an important role. Objectives: The objective of the study is to explore whether firms in service sector that receive government subsidies engage more in marketing and organizational innovation activities than their counterparts. Second, focusing on the subsidized firms in the service sector, the impact of innovations (marketing as well as organizational) on firm performance-measured as the probability of submitted copyright applications by firms, has been analyzed. Methods/Approach: The propensity score matching approach and probit model have been used to analyze the innovation activities of subsidized and non-subsidized firms. The empirical analysis is based on the micro level data from Mannheim Innovation Panel, covering the Community Innovation Survey of 2011. Results: Empirical results show that public subsidy has a significant positive effect on marketing and organizational innovation. In addition, within the firms that have received government subsidy, the impact of only marketing innovation is found to be significant on firm performance. Conclusions: These findings employ that subsidized firms are more likely to perform better than their counterparts. Furthermore, public subsidy programs increase the probability of applying for a copyright in small and medium firms.