THE IMPACT OF SUBSIDIES AND INCENTIVES ON FIRMS INNOVATION PERFORMANCE
Authors: Iskender Ahmet , Tas Oktay 
Published: January 2025

Purpose- The purpose of this study is to investigate the impact of government incentives on firm innovation performance in Turkiye, with the aim of providing an evidence-based framework for evaluating the effectiveness of these policies. By examining how various incentive mechanisms influence firms’ research and development (R&D) investments, product innovations, and process improvements, the study seeks to identify the key factors that drive innovation performance across different sectors and firm sizes. This research will contribute to the academic literature by addressing the ongoing debate surrounding the efficiency and effectiveness of government incentives. It will also provide strategic insights for policymakers, enabling the design and implementation of more targeted and efficient support mechanisms. Ultimately, the findings aim to enhance the alignment of government policies with Turkiye’s broader goals of fostering innovation, improving global competitiveness, and achieving sustainable economic growth.
Methodology- The methodology of this study is designed to analyze the impact of government incentives on firm innovation performance in Turkiye using a quantitative research approach. The primary dataset utilized is sourced from the World Bank’s Enterprise Survey (WBES), which covers over 150 countries and provides comprehensive information on various aspects of the business environment, such as financial access, corruption, infrastructure, competition, and firm performance. For Turkiye, six separate surveys conducted between 2002 and 2019 were utilized. These surveys include data from firms of varying sizes, sectors, and regions, capturing both those that received government incentives and those that did not. Based on a thorough literature review, a model tailored to the dataset was developed. The dependent variable is the presence of innovation within firms, measured as a binary outcome, while government incentives serve as the primary independent variable. Firm-specific characteristics frequently highlighted in the literature, such as firm size, age, export intensity, and sectoral distribution, are included as control variables to ensure a comprehensive analysis. The statistical analysis was conducted using the Logit regression technique in Python, chosen for its suitability in estimating the probability of binary outcomes. Diagnostic criteria such as Pseudo R-squared, log-likelihood, LL-Null, and the likelihood ratio test (LLR p-value) were employed to evaluate model fit and statistical significance. The results reveal that government incentives have a statistically significant effect on the likelihood of firm innovation, alongside other firm-specific factors. This methodological framework provides a robust basis for understanding the relationship between government support and innovation performance, offering valuable insights for policymakers.
Findings- The study reveals that R&D expenditures have the most significant impact on innovation, while the effect of firm size is relatively smaller. Government incentives and export ratios positively influence innovation likelihood, consistent with literature. Over time, firm age has shown a growing positive effect on innovation. In Turkiye, the probability of innovation for incentivized firms reached 19% in 2019, compared to 6% for non-incentivized firms, though the overall impact of incentives remains limited. International comparisons highlight Turkiye as having the lowest innovation probability among non-incentivized firms, with incentives providing modest improvements compared to other countries.
Conclusion- The findings highlight the limited effectiveness of government incentives in Turkiye compared to other countries with stronger incentive mechanisms, such as Slovenia and the Czech Republic. To address this, more strategic and targeted policies are needed to enhance the impact of incentives, reverse the declining innovation trends, and align incentive mechanisms with broader innovation strategies. These steps are critical for improving Turkiye's innovation performance, fostering competitiveness, and driving sustainable economic growth.

Keywords: Innovation performance, incentive, subsidies, logit regression, enterprise surveys, R&D expenditure.
JEL Codes: O31, O32, O38