Subsidising innovation over the business cycle

Abstract

We investigate whether the impact of direct support for business investment in R&D and innovation varies over the business cycle. We study whether firms that obtain public support in a recession differ from firms that obtain it during expansions; whether the impact of support is smaller in recessions than in expansions, and whether effects vary with the treatment pattern. Using firm-level data from Spain during the period 2005 to 2014, we combine propensity score matching and difference-indifferences methods to estimate firms' response. We find that (i) while the impact of support on monetary investment in innovation is pro-cyclical, it is counter-cyclical in terms of the employee-time allocation to innovation activities; (ii) the additionality of a one-year treatment is smaller than that of a longer treatment. Direct public support may have thus prevented a decline of the firms' knowledge capital during the recession.

The role of public loans in financing business R&D through the economic cycle

“…In order to reduce the default ratio, applicants should have an acceptable solvency situation. Our result is also in consonance with Busom and Vélez-Ospina (2020), who obtain that firms with difficulties accessing external funding are more likely to participate in subsidy programmes during the expansion, but not during the recession. They argue that this result can be explained by a break in firms' innovation plans during the crisis, so support is not requested.…”

“…Participation in CDTI programmes increased the ratio of R&D personnel intensity by more than 4% both before and during the crisis, which points out the relevance of public financing in maintaining R&D human capital. Busom and Vélez-Ospina (2020) find that the impact of direct support is counter-cyclical in terms of the human resources allocated to R&D, measured by the employee-time allocation to innovation activities. They argue that the support has allowed firms to allocate more of their employees' time to R&D activities, preventing a decline of knowledge capital during the recession.…”

“…However, they do not find evidence of additionality in any of the countries. For Spanish firms, Busom and Vélez-Ospina (2020) find that the effect of public support depends on the stage of the cycle, the duration of the support and the type of outcome indicator.…”

“…Also for Spain, Busom and Vélez-Ospina (2020) analyse the impact of direct support to business R&D over the business cycle using firm-level data for the period 2005-2014. They find that treatment effects are heterogeneous.…”

“…In sum, empirical studies about the effects of public support on the economic cycle are still scarce and provide evidence of heterogeneous impacts. Some researchers offer evidence of crowding-out effects during the crisis (Hud and Hussinger 2015), while others reject the hypothesis of full crowding out (Aristei et al 2017) or even find higher additionality effects during recessions for specific types of firms (Busom and Vélez-Ospina 2020). These previous studies focus on the effects of direct public support on R&D inputs.…”