📈 economics

Awareness Before Application: Institutional Absorptive Capacity and Smaller Firms’ Take-Up of Public Innovation Support

This paper analyzes Chilean survey data to demonstrate that the primary barrier preventing smaller firms from accessing public innovation support is a lack of awareness driven by institutional absorptive capacity constraints, rather than administrative burdens or application difficulties, suggesting that policy should prioritize active outreach over procedural simplification.

Original authors: Jeffrey Morales, Roberto Jalón

Published 2026-08-20

📖 7 min read🧠 Deep dive

CC BY 4.0

Original authors: Jeffrey Morales, Roberto Jalón

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Governments often create special programs to help small businesses grow and invent new things. These programs, which might offer tax breaks or direct funding, are designed to fix a common problem: companies are often too afraid to spend money on research because the risks are high and the rewards might belong to everyone, not just the inventor. To fix this, officials offer support. But there is a persistent mystery in economics: despite these offers, most small companies never sign up. They simply do not participate. For years, experts have assumed the reason was that the application process was too difficult, too expensive, or too confusing. The prevailing idea was that small firms wanted the help but were discouraged by the paperwork or feared they would be rejected. This assumption shaped policy, leading governments to try to simplify forms and create "one-stop shops" to make applying easier. However, a new study from Chile suggests this entire diagnosis might be wrong. It proposes that the problem is not that firms are too scared to apply, but that they do not even know the help exists.

Researchers Jeffrey Morales and Roberto Jalón set out to solve this puzzle by looking at the journey a company takes to get public support. Instead of just looking at who eventually got the money, they broke the process down into three distinct steps. First, a company must become aware that the program exists. Second, if they know about it, they must decide to apply. Third, if they apply, they must actually receive the support. Using a massive collection of data from Chile's National Innovation Survey, which tracked tens of thousands of companies over a decade, the team could see exactly where companies dropped out of the process. They focused specifically on a major tax incentive for research and development, a program that is open to any company that does certified research work.

The results revealed a startling reality. The researchers found that the vast majority of companies never even reach the application stage. In fact, roughly 91 percent of formal companies in Chile did not know that the main tax incentive for research existed at all. Because they were unaware, they never tried to apply. The study showed that only about 1.6 to 2.8 percent of all formal firms actually submitted an application. This means that the biggest barrier is not the difficulty of the paperwork, but the lack of information. The "missing" companies are not hiding in a pile of rejected forms; they are simply unaware that the opportunity is there.

The study also investigated why some companies know about the program while others do not. The researchers looked at the skills and resources inside these companies, specifically focusing on whether they had enough qualified staff. They found a strong link between a company's awareness and its human capital. Companies that reported a shortage of qualified workers were significantly less likely to know about the tax incentive. This suggests that having skilled employees helps a company absorb information about public policies, much like having a skilled team helps a company understand new technology. The researchers call this "institutional absorptive capacity." It is the ability of a firm to recognize, understand, and use information about government programs. When a company lacks these skilled people, it often fails to even notice the support available to it.

Once the researchers looked only at the companies that did know about the program, the story changed. Among those who were aware, the shortage of qualified staff did not stop them from applying. Companies with and without skilled workers applied at similar rates if they already knew the program existed. This finding challenges the old idea that small firms fail because they cannot handle the administrative burden. While the paperwork is indeed harder for companies with fewer skilled workers, that difficulty does not stop them from applying if they are already informed. The real bottleneck happens much earlier, at the moment of discovery.

The study also looked at why companies that knew about the program chose not to apply. For these informed non-applicants, the most common reason was not bureaucracy or fear of rejection. Instead, they said the program did not fit their business activities. They simply did not have research projects that qualified for the support. This confirms that for many companies, the issue is not a lack of courage or administrative skill, but a lack of relevance. The tax incentive is designed for research, and if a company is not doing research, the program is not for them.

The researchers also examined the role of business groups. They found that companies belonging to larger business groups were more likely to know about the tax incentive, likely because these groups share legal and accounting resources that help spread information. However, once these group companies knew about the program, they were actually less likely to apply than independent companies. This suggests that being part of a large group helps you hear the news, but it does not necessarily make you want to use the specific tool, perhaps because the group handles taxes in a different way.

The final piece of the puzzle involved the size of the company. The study showed that the gap in participation between small and large companies is almost entirely due to the awareness stage. Large companies are much more likely to know about the program. Once they know, they apply at rates similar to smaller companies. This means that the massive difference in who gets support is not because small companies are bad at filling out forms, but because they are left out of the information loop. The study calculated that awareness accounts for more than half of the gap in coverage between the smallest and largest firms.

The implications of these findings are direct and practical. For decades, policymakers have focused on making application forms simpler or creating offices to help companies fill them out. While making forms easier is still a good idea, this study shows that it only helps the tiny fraction of companies that already know the program exists. If 91 percent of companies are unaware, simplifying the form for the remaining 9 percent will not solve the problem. The researchers argue that governments need to shift their strategy from passive simplification to active outreach. Instead of waiting for companies to find the forms, officials should go out and tell them the program exists. This means working with universities, technology centers, industry associations, and accountants to spread the word. These intermediaries can reach the small companies that lack the internal staff to find the information on their own.

In the end, the study paints a clear picture of how public support fails to reach small businesses. It is not a failure of will or a failure of administrative capacity. It is a failure of communication. The support is there, and the forms are not the barrier. The barrier is silence. By understanding that the problem is awareness rather than application, governments can finally design policies that actually reach the small firms they intend to help. The path forward is not just to make the door easier to open, but to make sure the people who need to walk through it know the door is there.

Technical Summary: Awareness Before Application: Institutional Absorptive Capacity and Smaller Firms' Take-Up of Public Innovation Support

Problem Statement
Public innovation policies are frequently designed to support smaller firms, yet empirical evidence indicates that the vast majority of these firms never participate. Existing literature often attributes non-participation to "discouraged borrowers" (firms that anticipate rejection) or administrative incapacity (inability to navigate complex application processes). However, these explanations presuppose that firms are already aware of the policy instruments. This paper investigates where participation is lost along the access process, specifically questioning whether firms are excluded because they cannot apply or because they never learn that the opportunity exists. The study focuses on Chile's R&D Tax Incentive Law and competitively allocated innovation support, utilizing data from 2011 to 2022.

Methodology and Data
The authors utilize six waves of Chile's National Innovation Survey (ENI), covering 37,585 firm-wave observations. The core empirical strategy relies on three harmonized waves (2017–2022) containing 21,499 observations where a direct measure of awareness is available.

The study decomposes access to public innovation support into three sequential transitions:

Awareness ( $A_i$ ): Whether the firm knows the instrument exists.
Application ( $P_i | A_i=1$ ): Whether the firm applies, conditional on being aware.
Receipt ( $W_i | P_i=1$ ): Whether the firm receives the support, conditional on applying.

Unlike prior studies that condition on applicants (thereby inferring awareness), this research observes awareness directly for the full surveyed population. The authors estimate separate probit models for each transition, weighted by official firm-level expansion factors to represent the population of formal firms.

To address the statistical challenge of having only 15 industry clusters, the authors employ robust inference techniques, including score wild cluster bootstraps and pairs cluster bootstraps, rather than relying solely on asymptotic cluster-robust standard errors. They also conduct formal tests of stage asymmetry (comparing marginal effects across transitions), joint block tests, and equivalence tests to determine if coefficients are economically negligible.

Key Findings
The analysis yields four primary findings:

Dominance of the Awareness Gap: Participation in public innovation support is extremely low (1.6–2.8% of formal firms apply). Crucially, roughly 91% of formal firms are unaware that the main R&D tax incentive exists. Consequently, the coverage gap is lost overwhelmingly before the application stage.
Institutional Absorptive Capacity: A binding constraint on qualified labor (reporting a shortage of qualified personnel) is negatively associated with awareness (reducing the probability of knowing about the incentive by 3.4 percentage points) but is not associated with application conditional on awareness. This pattern supports the concept of "institutional absorptive capacity," where human capital is required to recognize and assimilate institutional information, not just to execute administrative tasks.
Instrument Relevance: Internal R&D activity displays the opposite pattern: it is not significantly associated with awareness but strongly predicts application conditional on awareness. This suggests that once firms are informed, the decision to apply is driven by the substantive relevance of the instrument to their specific innovation projects.
Administrative Burden vs. Participation Margin: While firms reporting qualified labor shortages are more likely to cite bureaucratic difficulties as a reason for not applying, this burden does not translate into a statistically significant reduction in application rates among informed firms. Conversely, business-group affiliates, who report fewer bureaucratic difficulties, are actually less likely to apply conditional on awareness. This indicates that administrative burden is unequally distributed but is not the binding constraint on participation for the informed population.

Decomposition of Coverage Gaps
When decomposing the coverage gap between the smallest and largest firms (by sales terciles), the authors find that awareness accounts for 56.6% of the total gap. The conditional application stage accounts for only 6.8% (statistically indistinguishable from zero), while the claiming stage accounts for 36.6%. This confirms that the primary barrier for smaller firms is not the complexity of the application process, but the failure to enter the information set.

Contributions and Significance
The paper makes three distinct contributions to the literature:

Sequential Analysis: It moves the analysis one stage earlier than previous studies by observing awareness for the full population, demonstrating that the dominant selection margin precedes application and accounts for most of the size-related coverage gap.
Extension of the Discouraged-Borrower Framework: It separates lack of information from application-stage constraints, extending the discouraged-borrower framework to an institutional setting where awareness cannot be assumed. It qualifies the view that smaller firms are primarily excluded by application-stage incapacity.
Concept of Institutional Absorptive Capacity: It introduces "institutional absorptive capacity" by linking incomplete take-up and administrative burden theories with absorptive capacity theory. This explains how formally neutral policies can generate unequal effective access when the capacity to absorb institutional information is unevenly distributed across firms.

Policy Implications
The authors argue that policy focus should shift from administrative simplification (e.g., simplifying forms or creating one-stop offices) toward active outreach. Since approximately 91% of firms are unaware of the incentive, simplifying the application process only benefits the small minority that already knows the program exists. The authors suggest that governments should complement procedural simplification with active dissemination through universities, technology centers, industry associations, accountants, and specialized advisers to reach firms with limited internal human capital.

The paper concludes that if awareness of a simple, formally neutral instrument like the R&D tax incentive is confined to roughly one in ten firms, the informational barriers for more complex financing mechanisms (e.g., equity participations or blended arrangements) are likely even higher, making the location of the friction a question of general policy design rather than a feature of a single tax credit.

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