Partly risky, partly solid – Performance study of public innovation loans

In this paper I attempt to measure the ability of a Norwegian publicly subsidized loan program to identify innovative firms that are victims of market imperfections. I apply three complementary control groups, which all have in common that they address specific unobservable characteristics of the program participants. The program participants perform better on a variety of growth measures compared to the firms rejected by the program. Compared with firms that receive private credit financing, I do not find that the program participants perform better in the upper quantiles of the contingent performance distribution despite a lower survival rate. The latter result suggests that the program does not seem to succeed in identifying a target group of firms with a sufficiently high growth potential. Firms with innovation loans are not outperformed by venture portfolio companies with respect to sales growth. The venture portfolio companies do, however, have higher survival rates as well as stronger growth in employment and assets. The latter result possibly indicates that the venture portfolio companies are more likely to succeed in the long run. The overall results indicate that the selection competency of the bureaucrats administrating the program is at level with that of private banks, and possibly also of that of venture funds. Still, in order for the program to provide the same level of welfare improvement as regular business credit provided by the private market, I find that the positive externalities from the program must be sufficiently large to compensate for the direct public subsidy element including risk adjusted return on equity and social costs of public funds.