Estimating the Local Average Treatment Effect of R&D Subsidies in a Pan-European Program

We investigate the effect of Europe's largest multilateral subsidy program for R&D-performing, small and medium-sized enterprises on firm growth. The program was organized under a specific budget allocation rule, referred to as Virtual Common Pot (VCP), which is designed to avoid cross-subsidization between participating countries. This rule creates exogenous variation in treatment status and allows us to identify the local average treatment effect of public R&D grants. In addition, we compare the program's effect under the VCP rule with the standard situation of a Real Common Pot (RCP), where program authorities allocate a single budget according to uniform project evaluation criteria. Our estimates suggest no average effect of grants on firm growth but treatment effects are heterogeneous and increase with project quality. A Real Common Pot would have reduced the cost of policy-induced job creation by 27%. We discuss the implications of our findings for the coordination of national policy programs within the European Research Area.

Hünermund, Paul and Dirk Czarnitzki (2016), Estimating the Local Average Treatment Effect of R&D Subsidies in a Pan-European Program, ZEW Discussion Paper No. 16-039, Mannheim, published in: Research Policy.