Modelling and Measuring the Effect of Public Subsidies on Business R&D: A Critical Review of the Econometric Literature*

Abstract

This paper reviews the principal econometric models used to measure the effects of public support for firm R&D investment. A taxonomy classifying papers according to the estimation method used (system of equations versus reduced-form), type of data (cross-sectional versus longitudinal), and type of policy variable (binary versus continuous) is provided. Through a historical reconstruction of the literature, the review starts by exploring the main features of early structural models and their recent refinements, by paying special attention to the issue of subsidy endogeneity. Subsequently, it discusses the second generation of the structural approach, the Selection-models, pointing out their ability in properly describing the two-player form of an R&D incentive scheme. It then goes on by treating and discussing more data-driven approaches, such as those based on Control-function and, more specifically, Matching. Finally, we address evaluation methods rooted in dynamic models of imperfect competition, considered as a novel promising stream of research within the last generation of 'harder' structural approaches. A discussion of features, advantages and drawbacks of each approach in a comparative perspective is offered to the reader, as well as suggestions for future improvements in this field of economic research. * This paper is part of the FIRB 2005-2008 strategic project on 'Models and tools for evaluating the short and medium term impact of firm R&D investments on the Italian productive system' financed by the Italian Ministry of University and Research. I wish to thank Bianca Potì and all the project's members for useful suggestions and the two anonymous referees for extensive comments that substantially improved the paper. All remaining errors are my own.JEL classifications: O32, C52, O38

R&D policies for young SMEs: input and output effects

“…The main focus in literature is on input additionality of subsidies. As a consequence, most of the literature addressed the issue of crowding-out effects of subsidized R&D. David et al (2000), Cerulli (2010) andZúñiga Vicente et al (2014) survey the literature on subsidy effects and find that, in general, the results of the reviewed literature vary; possibly also due to different data sources and methods.…”

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

“…One likely explanation for the lack of clear evidence is econometric problems related to selection, see David, Hall and Toole (2000), Klette, Møen and Griliches (2000), Jaffe (2002) and Cerulli (2010) for surveys. Wallsten (2000) explains the basic problem in one sentence: "Regressing some measure of innovation on the subsidy can establish a correlation between grants and R&D, but it cannot determine whether grants increase firm R&D or whether firms that do more R&D receive more grants."…”

The impact of R&D subsidies on R&D employment composition

“…In addition R&D support programmes may be targeted more at medium and long-term objectives (Cerulli, 2010;Zúñiga-Vicente et al, 2014). To recruit but also to fire R&D personnel, particularly highly qualified personnel, may imply high adjustment costs for the firms.…”

“…This literature analyses the impact of policy tools on firms' innovative performance indicators. The empirical evidence (David et al, 2000;García-Quevedo, 2004;Cerulli, 2010;Zúñiga-Vicente et al, 2014) has focused primarily on evaluating the impact of public funding on R&D inputs measured through R&D spending and R&D effort, and on R&D outputs such as patents, sales of new products or the number of new products and processes.…”