Estimating the Additionality of R&D Subsidies Using Proposal Evaluation Data to Control for Research Intentions

Abstract

Empirical examination of whether R&D subsidies crowd out private investments has been hampered by selection problems. A particular worry is that project quality and research intentions may be correlated with the likelihood of receiving subsidies. Using proposal evaluation data to control for research intentions, we do not find strong evidence suggesting that this type of selection creates a severe bias. Proposal evaluation grades strongly predict R&D investments and reduce selection bias in cross-sectional regressions, but there is limited variation in grades within firms over time. Hence, in our sample, unobserved project quality is largely absorbed by firm fixed effects. Our best estimate of the short-run additionality of R&D subsidies is 1.15, i.e., a one-unit increase in subsidy increases total R&D expenditure in the recipient firm by somewhat more than a unit. We demonstrate, however, that there is measurement error in the subsidy variable. Additionality is therefore likely to be underestimated. JEL CLASSIFICATION: O38, O32, L53, H25, H32

PUBLIC R&D POLICIES AND PRIVATE R&D INVESTMENT: A SURVEY OF THE EMPIRICAL EVIDENCE

“…The authors conclude that the fact that their study on the earlier period does not find any significant degree of additionality, while the study by Henningsen et al . () on the later period does find additionality, suggests that the effectiveness of this policy tool has improved over time. In a further dynamic panel data regression analysis, Bloch and Graversen () obtain additionality effects of public R&D funding for a sample of Danish firms.…”

Understanding the selection processes of public research projects in agriculture: The role of scientific merit

“…ERR presents an interesting template for our study for a number of reasons. Namely, the "competitive grant" fund allocation procedure followed by the regional authorities at ERR, greatly resembles the procedures followed by many other regional public authorities in Europe (see for instance the cases described in Bornmann and Daniel, 2006;Eickelpasch and Fritsch, 2005;Garcia and Menéndez, 2004;Henningsen et al, 2012), which adds to the generalizability of our results. Furthermore, the large number and diversity of funded projects by ERR (on average, from 2001 to 2006, €12 million was awarded annually, spread over 100 proposals), indicates that a number of factors can play a role in determining which proposal receives funding.…”

Corporate Returns to Subsidized R&D Projects: Direct Grants vs Tax Credit Financing

“…According to the Research Council, the average co-financing is 60-65 %, but as pointed out by Klette and Møen (2012), it is an open question to what extent the programmes induce firms to increase their total R&D investments as they may reduce non-subsidized R&D activities upon receiving an R&D grant. Research by Klette and Møen (2012), and Henningsen, Haegeland and Møen (2015) suggests that the own risk money is to a large extent taken from ordinary R&D budgets, implying that the firms would have spent this money on R&D anyway.…”