Who Gets the Money? The Dynamics of R&D Project Subsidies in Germany

Each year over three thousand R&D projects in more than two thousand firms received public grants from the German Federal Government. However, the number of subsidized firms does not reveal, whether it is always the same group of companies that receive funding, or whether the beneficiaries change over time. Understanding the temporal structure of subsidy distribution could help future research explain the effects and effectiveness of subsidies. In the face of shrinking government budgets and intensified international competition in the field of technology, knowing and increasing the efficiency of innovation policies has become crucial.
The focus is set on a specific public support scheme, the German Federal Government’s non-defense R&D project funding scheme (DPF). This is the most important tool used by the German government to fund R&D in private businesses. In 2005, firms received over 700 million euros under this scheme. The importance of this funding scheme will increase in Germany in the coming years since it is the main distribution channel for the new High-Tech strategy launched by the Federal Government (BMBF, 2006b).
The aim of this paper is to analyze the structure of the firms receiving R&D subsidies over time. In particular, I tackle the question of whether the same firms enjoy subsidies over time. There is still very little empirical evidence on the dynamics of firms' participation in public funding schemes. In order to investigate the persistence of funding it is necessary to distinguish between two types of persistence. One is simply due to the fact that funded projects may run for more than one calendar year. The other is due to newly approved projects. In the DPF scheme, approved projects last on average for about three years.
The empirical part of this paper is based on an annual innovation survey, the German part of the Community Innovation Survey (CIS). This is merged with the DPF database in order to identify a firm’s subsidy status in each year. The sample consists of over 6,000 different firms covering the manufacturing and knowledge-intensive service sectors over the time period from 1994 to 2004.
Transition rates are calculated which describe the participation in the DPF scheme between two periods in a univariate context. The share of innovating firms which enter the funding scheme is extremely low. But if a firm has made it into the DPF scheme, the probability of getting subsidies for new projects in the following year is higher than that of dropping out of the scheme. Overall, participation in the funding scheme is found to be quite stable.
The multivariate analysis also shows that for the probability of getting new projects approved for the funding scheme, experience in the same scheme matters, beyond the subsidy status in the preceding year. In order to enter the DPF scheme, experience with other subsidy programs is also helpful. At the same time, it is important to control for the overall supply of subsidies. In addition, large firms are more successful in receiving funding for new projects. Thus the evidence cannot confirm that the scheme is achieving the government's aim of supporting SMEs in particular. The hypotheses that firms with higher knowledge capabilities are more likely to enter and stay in the scheme can be supported as I found positive impacts of R&D activities and human capital.

Aschhoff, Birgit (2008), Who Gets the Money? The Dynamics of R&D Project Subsidies in Germany, ZEW Discussion Paper No. 08-018, Mannheim, published in: Jahrbücher für Nationalökonomie und Statistik.