Too Much of a Good Thing? The Dual Effect of Public Sponsorship on Firm Performance

Abstract

We examine the effects of organizational sponsorship on firm performance by investigating the impact of subsidies as a public resource allocation mechanism in the context of French film industry. Existing research provides contradicting perspectives on the effect of public resource allocations on target organizations suggesting a positive effect on firm level outcomes, while also a potentially weakened competitive position and reduced performance. Drawing on economic theories on incentives and resource based perspective of a firm, we argue that these conflicting insights can be explained by untangling the initial resource buffering effect from a more gradual incentive and resource altering effect of public sponsorship on target firms. We propose a two-stage model that demonstrates how repeated, cumulative public resource allocations are associated with positive first-order effects, yet, a gradual detrimental change in a target firm’s market-based resources and capabilities, leading to a curvilinear relationship between sponsorship and firm performance. We further argue and find this relationship being significantly attenuated by the horizontal scope of a firm, with both effects substantially more pronounced for generalist rather than specialist firms. Our work highlights the resource and incentive trade-offs associated with resource sponsorship by the state and other patrons, and carries important managerial and policy implications.