Small grant subsidy application effects on productivity improvement: evidence from Japanese SMEs

Abstract

This study examines the effects of a small grants subsidy on small- and medium-sized enterprises’ (SMEs) productivity. Using rich Japanese firm-level data, we analyze the effects of both applying for and receiving subsidies. We employ a sharp regression discontinuity design for the receipt effects and a difference-in-differences (DID) design for the application effects. The result shows that there are no statistically significant changes in likelihood after receiving the subsidy. By contrast, applicants experienced higher productivity and sales growth than non-applicants. These positive effects are most obvious in post-entry firms whose operating years are 6–10 years in the service sector. These results are robustly confirmed using a DID model with propensity score matching, controlling for both pre-intervention levels and trends in the outcome. Our findings imply that the subsidy application process with external support fosters entrepreneurship for firms that have survived the first 5 years after start-up, leading to their growth.