The Causal Effects of R&D Grants: Evidence from a Regression Discontinuity

Abstract

We leverage the discontinuity in the assignment mechanism of the Small and Medium Enterprise Instrument - the first European R&D subsidy targeting small firms - to provide the broadest quasi-experimental evidence on R&D grants over both geographical and sectoral scopes. Grants trigger sizable impacts on a wide range of firm-level outcomes. Heterogeneous effects are consistent with grants reducing financial frictions. This reduction is due to funding rather than certification. We also provide direct causal evidence on pure certification - signaling not attached to funding - and show that firms that only receive ‘quality stamps’ do not improve their performance. Finally, our estimates suggest that the scheme produces private returns that are positive and comparable to those of the US Small Business Innovation Research program, while also generating geographical and sectoral spillovers in the form of increased rates of entrepreneurial entry.

Public Procurement as an Innovation Policy: Where Do We Stand?

“…They find a positive effect, driven by small firms, and a nonsignificant effect for larger firms, thus indicating that GPP triggers a demand-pull effect for small firms only. This finding is consistent with the idea that firms generally subject to greater financial constraints are more likely to respond to innovation policies (Dechezleprêtre et al 2016;Santoleri et al 2022).…”

“…Publicly funded R&D other than PPI has been shown to have positive spillovers on the economy (Fleming et al 2019), thus mitigating concerns related to the crowding-out effects that may result from government support for innovation. Recent causal evidence on R&D grants (Santoleri et al 2022) and R&D tax credits (Dechezleprêtre et al 2016) furnish robust empirical evidence that government technology-push policies can encourage innovative private-sector investment. 8 Promoting private innovation activities directly or indirectly is also the ultimate goal of PPI interventions.…”

“…For instance, in the context of R&D grants, sectoral spillovers are channeled in the form of higher rates of entry into entrepreneurship(Santoleri et al 2022). …”

Public expenditure, risk sharing and economic growth

“…To overcome this market failure, governments therefore set up public innovation support programs such as R&D subsidies, subsidized loans, and R&D tax credits (Chiappini et al., 2022). The impacts of public innovation support programs might alleviate financial constraints through two different mechanisms (Chiappini et al., 2022; Santoleri et al., 2022): (i) certification effects (e.g., the grant signals firms' high‐quality to the market) or (ii) funding (or resource) effects (e.g., the grant is used to demonstrate the viability of a technology, thus decreasing risk for the investor and mitigating information asymmetry). Our results present a novel mechanism to the literature by suggesting that public policy may alleviate financial constraints through risk sharing.…”

Bureaucratic Frictions and Innovation Procurement

“…Indeed, recent studies have highlighted that technical and scientific progress depends crucially on public spending (Fleming et al 2019;Moretti et al 2019). In addition to granting intellectual property rights (Jaffe 2000) and adopting supply-side policies (Dechezleprêtre et al Forthcoming;Azoulay et al 2019;Santoleri et al 2022), governments can effectively spur innovation by directly procuring R&D from businesses and institutes of higher education. In the US, R&D procurement accounts for about one-third of the $130 billion annual federal R&D budget (de Rassenfosse et al…”