Do Direct R&D Subsidies Lead to the Monopolization of R&D in the Economy?

The market for R&D is subject to market failure which leads to an underprovision of R&D from a social point of view. This gives rise for governmental intervention in the market for R&D. For decades, the predominant question in the literature on R&D subsidy has been on potential crowding-out effects. There is some concern that subsidy recipients simply substitute public for private investment so that the subsidy would not generate any additional R&D efforts. The more recent microeconomic literature on the effects of R&D subsidies, however, goes beyond the question of crowding out. This paper also makes a contribution into this direction. A question that has never been investigated so far is the effect of R&D subsidies on the distribution of R&D effort in the economy. The distribution of R&D bears important insights for policy makers and academics studying market structure and/or economic growth. Some work in the field of endogenous growth theory has suggested that R&D subsidies have an important influence in the concentration of R&D in the economy and eventually also persistent dominance of market leaders and thus on log-run monopolization of markets. In this study, we estimate Gini indices for R&D in the German and the Finnish manufacturing sector. In particular, we use data from the Community Innovation Survey. The sample data can be extrapolated to the population figures, and we estimate the Gini coefficient of R&D concentration in the economy. This reflects the actual situation in the economy. Furthermore, we proceed by estimating a treatment effects model in order to derive the counterfactual situation, that is, what firms would have invested if they had not been subsidized. This hypothetical situation is then also extrapolated to the population of firms. With regard to the R&D subsidies, we find that full crowding-out can be rejected both in Germany and Finland. Furthermore, it turns out that the concentration of R&D is significantly lower in the actual situation when compared to the counterfactual where no R&D subsidies would be present.

Czarnitzki, Dirk and Bernd Ebersberger (2010), Do Direct R&D Subsidies Lead to the Monopolization of R&D in the Economy?, ZEW Discussion Paper No. 10-078, Mannheim.