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Research papers find benefits of Government Financial Assist has Positive Impact on Private Finance

A recent report published from the Office of the Chief Economist has found that government assistance (such as that available from the R&D Tax Incentive) has a positive impact on a company’s ability to generate external finance.

The report referenced previous papers investigating the effectiveness of R&D Tax Incentives which found substantial evidence that receiving R&D tax subsidies improve the likelihood and amount of external financing available to a firm, especially when the firm is small and high-tech (Lerner, 1999; Feldman & Kelley, 2006; Takalo & Tanayama, 2010; Meuleman & De Maeseneire, 2012).

  Notable extracts from the recent report from the Office of the Chief Economist include the following :

• “Receipt of government assistance affects firms through increasing their propensity to seek financing and further by increasing their propensity to obtain the financing;
• government financial assistance can have a much broader impact than just supplying firms with direct cash;
• investors take notice and consider firms with government assistance more favorably. This effect amounts to behavioral additionality on the part of investor;
• the largest additionality from this affect accrues to young and innovative firms;
• the linkage from tax concessions to more accessibility of investment in innovation makes a strong case for the supportive role the R&D Tax Incentive program plays for the young and innovative firms.”

 The report also detailed findings from the author that AusIndustry personnel had advised that investors and banks have a preference for tax concessions over grants given that:

• Grants are project specific and are consumed before the end of the financial year;
• Investors treat tax concessions as some kind of collateral for the attaining of finance;
• Tax concessions are awarded at the end of the financial year, and if the firm runs into financial troubles during the year, the investor can step in and lay claim to the tax concessions to cover part of its losses. Consequently, apart from sending a signal about capability or credit-worthiness, government assistance can also serve as a substitute for collateral if it is paid towards the end of the financial year.