Financial subsidies for innovative projects

Grants and financial subsidies are one of the most common forms of government assistance for businesses, including capital-intensive innovation projects.

For example, European countries have developed a wide range of business finance programs that offer non-repayable funds for various purposes.

They are usually offered by governments to companies that operate in certain industries and pursue strategic goals that are consistent with the policy of the state or region. An example would be the introduction of innovations in the energy sector and environmental projects.

Innovation is considered a key factor in the development of the modern economy. Therefore, the public sector allocates more financial resources to activities related to innovation, including support for innovative enterprises.

This applies to both large companies and SMEs, which are playing an increasingly important role in creating an innovative economy.

Obviously, the development of innovative projects requires large financial costs, and banks are reluctant to issue loans for innovative ideas, which, as a rule, are burdened with high risk.

In addition to domestic resources, there are a large number of other options for financing innovative businesses, such as financial subsidies, grants, as well as additional financial engineering tools.

Non-repayable investment subsidies and repayable instruments

Subsidies have a sharp positive effect on the development of innovative projects and increasing the competitiveness of companies in the local and foreign markets.

This form of financial support is the most preferable from a business point of view, as it allows, at least in the medium term, to refuse or limit the use of debt instruments. Subsidies allow capital-intensive innovation projects to develop faster than in the case of self-financing or debt financing. This is critical because innovation only makes sense when it enables the project initiator to significantly outpace the competition.

Without investment subsidies, many companies would not dare to undertake bold projects that later turn out to be key to the further development of entire industries. On the contrary, repayable financial instruments, at least in this respect, are less beneficial for business development.

While they remain attractive and affordable, they provide less incentive for companies to make the necessary development investments.

Ultimately, grants and subsidies are accelerating the process of restructuring and modernizing businesses around the world, especially in the energy sector, information technology, infrastructure and knowledge-intensive industries.

They also contribute to overall economic development, although to varying degrees in different countries and regions.

Subsidies and grants from international organizations are always associated with the disclosure of project information. For this reason, these financial instruments are not suitable for supporting some innovative projects with high potential. The more important the time factor, the secrecy, or the greater the uncertainty about the future results of the project, the less suitable the use of an investment subsidy seems to be.

In these cases, repayable financial instruments are most appropriate.

Receiving an investment subsidy increases the confidence of potential lenders.



On the other hand, the grant directly supports real business processes, and financial intermediaries receive less benefit than in other models of financial engineering or venture capital support programs.

The grant allows government innovation support bodies to directly control supported projects. Financial engineering, on the other hand, provides businesses with access to a variety of debt financing options, and the need to repay borrowed funds helps businesses use them more efficiently. Ultimately, the need to return funds limits their risky use.

From the other hand, support in the form of an increase in equity capital or the repayment of project debts, at least in part in the event of bankruptcy, would stimulate high-risk R&D.

However, it is difficult to expect that the company will use the funds obtained through financial engineering for the implementation of risky research and development projects.

Some limitations of investment subsidies in innovative projects

The subsidy as an instrument of government intervention has many disadvantages that should be taken into account when planning large innovation projects with many stakeholders.

In addition to the complex application process, which many entrepreneurs find difficult, it requires significant effort in terms of documentation, analysis, and monitoring due to the wide variety of grant competition requirements (local, national and supranational grant programs).

The variety of programs causes problems with access to information about subsidies. Although the quality of business advisory services has improved significantly in recent years, the information system is still imperfect.

Particular attention should be paid in the case of grants for innovative projects, where it is extremely important to gain a time advantage over competitors.

In the so-called high technology, the life cycle of products and services has been reduced, and the resulting time advantage is a competitive factor.

Here, the speed of project financing is of great importance.

The long duration of attracting subsidies and the duration of the project actually means that non-repayable financing is difficult to use for investment projects with significant innovative potential and very high investment risk. In this case, the venture capital mechanism is the best method of financing such an enterprise.

The public investor's participation in or investment in target venture fund companies is subject to standard non-disclosure agreements. This is especially important when time and confidentiality are key to a project.

The use of the venture capital mechanism in the case of many investments is much more expedient and convenient. At the same time, it allows innovative enterprises to receive funds faster. The essence of the activities of venture funds is to make a profit, so they are interested in protecting information about innovative projects and technologies of interested parties.

This allows the investor to obtain a high economic surplus and achieve the expected rate of return. This is especially important in those projects where it is important to gain an advantage over competitors (the so-called first-mover advantage). This can be explained by at least two reasons.

First, technology leadership is very often important in today's economy and business. It determines the profitability and prospects of any company.

Secondly, the technological leadership of innovative companies is associated with a significant risk, mainly due to the technological and market risk of an innovative project. Therefore, parties that take on risky innovative projects must respect trade secrets. To the greatest extent, this is possible thanks to the mechanism of venture capital.

On the other hand, financial subsidies usually do not provide an adequate degree of confidentiality.



The use of European Union funding programs, for example, requires maintaining a certain life cycle of the project as well as achieving performance targets.

One of the important requirements is the preservation of capital in a particular region for a certain period. Violation of the terms of financing can have serious consequences for an innovative project, up to the withdrawal of a subsidy. On the other hand, this significantly limits the flexibility of the project.

To some extent, this may limit the possibility of restructuring the company during the life of the project. Rational economic analysis can justify the introduction of changes in the object of investment, its termination or replacement with another investment.

More attention is paid to the formal aspects of the sustainability of the project, which are taken into account in the process of evaluating projects in grant competitions.

The determinant of project sustainability should be considered a realistic assessment of the chances of the project continuing without public support. Consideration should also be given to whether the project will continue under the changed rules or whether the project will remain sustainable in difficult market conditions.

In the evaluation of co-financing applications, the success of the investment is less important than the formal and technical elements, and these elements actually determine whether a portion of the project costs specified in the contract will be funded.

If you are interested in financing large investment projects in Europe, the USA, the Middle East or other regions, please contact our team.

GCAM Investment Group offers a wide range of advanced financial solutions for large businesses, including long-term loans, project finance, etc.

In addition, we provide additional professional services to support investment projects, including financial modeling, financial engineering, loan guarantees and project management.