The dark side of public money? The dual effect of public sponsorship on firm performance

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 the 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 twostage 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.