Sunk Costs, Extensive R&D Subsidies and Permanent Inducement Effects

Abstract

We study whether there is scope for using subsidies to smooth out barriers to R&D performance and expand the share of R&D firms in Spain. We consider a dynamic model with sunk entry costs in which firms' optimal participation strategy is defined in terms of two subsidy thresholds that characterize entry and continuation. We compute the subsidy thresholds from the estimates of a dynamic panel data type-2 tobit model for an unbalanced panel of about 2,000 Spanish manufacturing firms. The results suggest that "extensive" subsidies are a feasible and efficient tool for expanding the share of R&D firms.

The impact of public support on firm propensity to engage in R&D: Spanish experience

“…We use the method proposed by Wooldridge (2005) to control for this possibility of persistence. Our results confirm 1 See, for example, the papers by Arqué-Castells and Mohnen (2012) and Arqué-Castells (2013).…”

“…Noteworthy are the studies by Busom (2000), González, Jaumandreu and Pazó (2004), González and Pazó (2008), Arqué-Castells and Mohnen (2012) and Arqué-Castells (2013). Busom (2000) takes advantage of a database containing both firms awarded aid by CDTI grants in 1988 and innovative firms not granted aid.…”

Subsidies, financial constraints and firm innovative activities in emerging economies

“…Ideally, availability of panel data would help identify whether subsidy policies may have lagged effects on innovation as well. As suggested by Arque-Castells and Mohnen (2015), tailored subsidy policies could both trigger new firms engage in R&D and support existing innovators. Ensuring innovation continuation and persistence over time would make public intervention via subsidies of utmost importance for emerging economies, given the positive link between innovation and long-term economic growth.…”

“…Takalo et al (2013a) model the subsidy application and R&D investment decisions of the firm and also the subsidy granting decision of the public agency in charge of the program to estimate the expected welfare effects of targeted R&D subsidies using project level data from Finland. Allowing for both fixed and sunk costs affecting firms' R&D participation and continuation decision, Arque-Castells and Mohnen (2015) show that subsidy policies may have long lasting effects. Their dynamic additionality prediction finds support in empirical results obtained on a panel of Spanish manufacturing firms: subsidy policies may affect both the number of R&D firms and intensity.…”

Directing technical change from fossil-fuel to renewable energy innovation: An application using firm-level patent data

“…2 Accordingly, technological transitions can occur both through a shift of innovation activities within existing firms and through innovation entry and exit. The empirical literature in this line of research documents several key stylized facts about innovating firms: (1) the distribution of R&D intensity among firms is highly skewed: a large number of firms perform little R&D, while a small number of firms have very high R&D intensities; (2) large established firms innovate a great deal but tend to focus on improving existing technologies (Cohen and Klepper, 1992;Akcigit and Kerr, 2010); (3) small firms and new entrants are often believed to be the source of more major and radical innovations than are large firms (Akcigit, 2011;Kamien and Schwartz, 1975); 3 (4) there are high sunk and fixed costs to start R&D, such as the setup of an R&D lab, the purchase of equipment, and the configuration of the necessary infrastructure (Stiglitz, 1987;Hall and van Reenen, 2000;Arque-Castells and Mohnen, 2012). 4 Moreover, these costs may vary across firms (Stiglitz, 1987;Hall and van Reenen, 2000;Manez et al, 2009).…”