This study attempts to empirically investigate the effect of government R&D investments on private firms' R&D investments in the Korean manufacturing sector for the period 1995 to 1998. Economists have examined a variety of events for signs as to whether the relationship between government and private R&D investments is on the balance complementary or substitutes.

The main results of this study are as follows: First, we find that R&D subsidies granted by the government have stimulated company-financed R&D expenditures. Second, it is noticeable that the coefficient on above-average government R&D is statistically significant, implying that there is more R&D investments for private firms with above-average government R&D subsidy. Third, in high-tech and in rapidly growing industries, the more government R&D, the less productive is private R&D investment, implying that the government should allocate more resources in basic or primary research fields that are bound to result in more social benefit rather than participate in R&D investments in specific private sectors where it is more profitable to stimulate private R&D.