Innovation Subsidies: Does the Funding Source Matter for Innovation Intensity and Performance? Empirical Evidence from Germany

It is well-known that R&D and innovation investments by the private sector suffer from market failure and thus the investment level in the economy is below the social desirable level. It is also a well-known fact that governments of industrialized countries try to correct for such market failure by subsidizing R&D and innovation. It has been discussed for decades whether those policies are subject to crowding out effects. A topic that did not receive a lot of attention in the literature so far, however, is the fact that many different policies may influence a private investor's decision on R&D and innovation activities simultaneously. So far, scholars have either evaluated one specific policy instrument or otherwise treatment effects have been derived as averages of different policy interventions. In this paper, we go one step further and explicitly distinguish between national and European policies. In particular, we are interested in measuring the impact of one specific policy, namely direct subsidies for innovation and R&D given that this constitutes the main policy instrument in Germany. More precisely, we analyze the relationship between national funding, European funding and the combination of both on innovation input and output using a sample of German firms. We conduct a multiple treatment effects analysis on the impact that national subsidies compared to, or in combination with, European subsidies have on innovation and R&D intensity. Furthermore, in order to estimate the impact of these policies on innovation performance, we analyze whether subsidies, and the different combinations of the latter, have an impact on innovation sales, on sales with market novelties or on future patents applications. Since filing patents for subsidized R&D is often advised by the funding agency, we further analyze whether the filed patents by subsidized firms get more or less forward citations than patents filed in the counterfactual situation of getting no or other subsidies. Positive effects of those treatments, and the awareness of which combination of policy mix (national, European or both) has the highest impact on innovative activity, is a crucial prerequisite for efficient European and national innovation policies. We find that both EU grants and national grants, as well as the combination of both, lead to higher innovation input in the economy when compared to a situation where these policies would be absent, i.e. the counterfactual where the recipient firms would not be funded. In addition, we find that EU grants compared to national grants have a higher effect on innovation input which can possibly explained by a larger average grant amount. Hence, full crowding out can be rejected for both types of grants. With regards to innovation performance, we find evidence that publicly funded firms do not perform worse when compared to a counterfactual where the recipient firms would have the same innovation budgets without receiving subsidies. Keeping innovation investment constant allows us to indirectly conclude that the granted research projects have a similar productivity as purely privately funded projects. In terms of products sold that are new to the market, we find that firms that receive funding from both sources have the highest sales. We further find that firms that do not get subsidies or get subsidies from either one of the sources would yield more sales with market novelties if they would get a top-up from either of the sources. In terms of total innovation sales, we find superiority of national grants when compared to a counterfactual of no grants or receiving EU grants only. In terms of future patent applications, we find that nationally funded firms (only national or in combination with EU funds) are more likely to apply for patents in period t+1. In addition, we can conclude that the filed patents were of high quality given that they have on average more forward citations per patent than the patents filed in the counterfactual situation where no grants (or grants from only one source) are received.This finding that national subsidies (and the combination of national and EU subsidies) seem to be successful is reassuring in the light of future German policy programs where the goal is to increasingly deliver public support from the EU through existing national channels.

Czarnitzki, Dirk and Cindy Lopes-Bento (2011), Innovation Subsidies: Does the Funding Source Matter for Innovation Intensity and Performance? Empirical Evidence from Germany, ZEW Discussion Paper No. 11-053, Mannheim, published in: Industry and Innovation.