The impact of public R&D expenditure on business R&D*

This paper attempts to quantify the aggregate net effect of government funding on business R&D in 17 OECD Member countries over the past two decades. Grants, procurement, tax incentives and direct performance of research (in public laboratories or universities) are the major policy tools in the field. The major results of the study are the following: Direct government funding of R&D performed by firms has a positive effect on business financed R&D (except if the funding is targeted towards defence activities). Tax incentives have an immediate and positive effect on business-financed R&D; Direct funding as well as tax incentives are more effective when they are stable over time: firms do not invest in additional R&D if they are uncertain of the durability of the government support; Direct government funding and R&D tax incentives are substitutes: increased intensity of one reduces the effect of the other on business R&D; The stimulating effect of government funding varies with respect to its generosity: it increases up to a certain threshold (about 10% of business R&D) and then decreases beyond; Defence research performed in public laboratories and universities crowds out private R&D; Civilian public research is neutral for business R&D. * We thank the participants to various seminars, including the OECD Committee for Scientific and Technology Policy and the NBER 2000 Summer Institute on Productivity for helpful comments and suggestions. All opinions expressed in this article are those of the authors and do not reflect necessarily the views of the OECD or Université Libre de Bruxelles.     

A computational analysis of R&D support programs

We compare two common government R&D support programs, R&D tax credits and direct R&D grants. To study their effectiveness and the extent to which their design matters, we analyze these programs within a dynamic equilibrium model of imperfectly competitive industries. Adopting comprehensive welfare measures that take into account government, producer and consumer surpluses, we find that both schemes exhibit positive social returns. Mid-range R&D-intensive sectors exhibit higher social returns than either high or low R&D-intensive sectors. Both incentive schemes generate positive measures of R&D input additionality of magnitudes consistent with empirical R&D research. However, R&D grants that require firms to allocate subsidy funds to R&D spur less R&D than a more flexible R&D tax credit. Subsidy schemes can even induce competing firms to over-spend on R&D, generating negative producer surplus and possibly negative social returns.     

An Empirical Evaluation of The Effects of R&D Subsidies

R&D subsidies are a common tool of technology policy, but little is known about the effects they have on the behavior of firms. This paper presents evidence on the effects that R&D subsidies have on the R&D effort of recipients, and on the probability that a firm will participate in a program granting R&D subsidies. The empirical model consists of a system of equations: a participation equation; and an R&D effort equation. Endogeneity of public funding is controlled for. Estimates are obtained with a cross-section sample of Spanish firms. The main findings are that: 1) small firms are more likely to obtain a subsidy than large firms, probably reflecting one of the public agency's goals; 2) overall, public funding induces more private effort, but for some firms (30% of participants) full crowding out effects cannot be ruled out, and 3) firm size remains related to effort, whether or not a firm gets public funding.     

R&D boundaries of the firm: An estimation of the double-hurdle model on commissioned R&D,joint R&D,and licensing in Japan

This paper studies the firm’s decisions on in-house R&D and its procurement from outside through commissioned R&D, joint R&D, and technology acquisitions (i.e., licensing-in). Using the data about 14,000 manufacturing firms in Japan, we estimate a modified double-hurdle model in which the first hurdle determines whether the firm should perform any R&D at all and the second hurdle determines whether (and how much) it should perform each mode of procured R&D. The results generally support the two major theories—the transaction cost theory and the capability theory. The estimated positive effects of firm size, in-house R&D intensity, diversification, and vertical integration support the hypothesis that capability is needed for procured R&D, while the estimated positive effect of the index of appropriability by patents supports the hypothesis that this appropriability reduces transaction costs. In addition, we found that information flow from scientific sources and that from transaction-based sources affect the three modes of procured R&D differently.     

The impact of R&D subsidy on innovation: evidence from New Zealand firms

This study examines the impact of government subsidy through R&D grants on innovation output for firms in New Zealand. Using a large database that links administrative and tax data with survey data, we find that R&D grants have a stronger effect on more novel innovation (e.g. applying for a patent or introducing new products to the world) than on incremental innovation (e.g. any product innovation) and that larger, project-based grants are more effective at promoting innovation than smaller, non-project-specific grants. There is little evidence that R&D grants have differential effects between smaller (<50 employees) and larger firms.     

R&D,public innovation policy,and productivity: The case of danish manufacturing

The purpose of this paper is to investigate the relationship between private R&D, public innovation support transferred to the private sector, and productivity in Danish manufacturing. Two main conclusions are established. First, public innovation support has a positive and significant effect on private R&D expenditures with an estimated elasticity of 0.062. Second, the indirect effect on productivity from public innovation support is reflected in a positive point estimate which is found to be robust to different specifications of R&D capital.     

Effectiveness of R&D subsidies during the crisis: firm-level evidence across EU countries

This paper is one of the first attempts in the literature to evaluate the effectiveness of R&D policies in Europe during the great crisis of the late 2000s. Using homogenous firm-level data for the largest EU Member States over the period 2007–2009, we test whether manufacturing firms receiving public subsidies spent more on R&D. The analysis is performed using both non-parametric techniques and parametric estimation methods accounting for the possible endogenous selectivity of R&D subsidies. The hypothesis of full crowding-out is rejected in all countries under exam as firms did not replace their own resources with public grants. However, these firms did not allocate additional funds to research and hence, differently from earlier works, we do not find evidence for additionality effects of R&D subsidies. Our estimates indicate that, albeit not expansive, public subsidies to R&D thwarted the reduction of firm R&D efforts in the aftermath of economic crisis.     

Public Technology Infrastructure,R&D Sourcing,and Research Joint Ventures

In this paper, we define public technology infrastructure to mean public resources that bring new R&D into existence. Examples are public research that yields knowledge spillovers and government contracts that broker new research. Using this definition we explore the effect of public infrastructure on cooperative R&D, especially R&D sourcing and research joint ventures (RJVs). Our findings strongly suggest that public infrastructure promotes cooperative R&D. We begin by studying the role of federal laboratories in R&D sourcing by private laboratories, finding that sourcing increases as a result. Then we examine patents arising from RJVs sponsored by the Advanced Technology Program (ATP). We find that R&D subsidies as well as difficulty and novelty increase patents produced by the RJVs. Contractual oversight by ATP has no direct effect but an indirect effect appears to exist, since firms value ATP oversight more highly for more difficult and novel projects, and these produce more patents.     

R&D policy in a vertically related industry

In this paper, we analyze the effectiveness of public policy aimed to stimulate business-performed R&D in a vertically related market. We examine the role of an R&D active upstream supplier in a four-stage R&D model, where we incorporate public funding. The considered policy instrument is direct funding of firms’ R&D efforts. We calculate the optimal policies and show that they have a positive impact on firms’ R&D investments. From a welfare point of view, it is optimal to differentiate the subsidy rates between the upstream and the downstream markets. Competition in the product market leads to a higher subsidy rate to the upstream supplier than to the downstream firms. When concentration is high in the downstream market, the optimal solution is an R&D subsidy for these firms, otherwise the optimal solution is an R&D tax for the downstream firms.     

Financing constraints for R&D in China: the role of state ownership

We investigate financing constraints for R&D in China. We find that Chinese private firms are financially constrained for R&D, while state-owned enterprises are not. Mature private firms encounter more severe financing constraints for R&D than young private firms. Moreover, the expansion of external financing supply does not relax the financing constraints for R&D faced by private firms.     

Government grants,private R&D funding and innovation efficiency in transition economy

Although the development of the high-tech industry is part of the national agenda of many countries, particularly transition economies, few studies have analysed innovation efficiency in countries with environments unfavourable to high-tech industry development. This study explores the relationships of government grants, private R&D funding and innovation efficiencies of the high-tech industry in China. We use a stochastic frontier analysis model to study the roles of government and market mechanisms in high-tech industry innovation from 1995 to 2008. Findings show that government grants do not crowd out private funding, but stimulate private R&D expenditure. Private R&D funding has positively influenced innovation in the Chinese high-tech industry, and efficiency potentials are widely under-exploited. Additionally, government grants are observed to negatively impact innovation by large firms in the Chinese high-tech industry. Furthermore, we reveal that human capital can promote the innovation performance of high-tech firms, excepting those of medium scale. The findings provide insightful perspectives on China's high-tech industry.     

Input and output additionality of R&D subsidies

This article analyses the effects of public R&D subsidies on R&D input and output of German firms. We distinguish between the direct impact of subsidies on R&D investment and the indirect effect on innovation output measured by patent applications. We disentangle the productivity of purely privately financed R&D and additional R&D investment induced by the public incentive scheme. For this, a treatment-effect analysis is conducted in a first step. The results are implemented into the estimation of a patent production function in a second step. It turns out that both purely privately financed R&D and publicly induced R&D show a positive effect on patent outcome.     

Assessing the influence of differentiation strategy and R&D subsidies on R&D cooperation

This paper explores the R&D cooperation determinants of the innovative companies belonging to the Spanish manufacturing sector. Our findings suggest that the variable R&D subsidy is endogenous, significant, and has a strong positive influence on R&D cooperation. This is a clear indication that the achievement of public aid is often conditioned by the obligation for companies to cooperate in R&D. We have also found that the differentiation strategy variable is significant and has a negative influence on R&D cooperation. Companies positioned in a differentiation strategy probably own and use some different knowledge from other companies. Consequently, they will not have much interest in taking advantage of the spillovers generated by other companies. It is therefore logical that they are reluctant to establish cooperation agreements on R&D. Therefore, companies positioned in the differentiation strategy need public policies to support R&D that are not conditioned to the establishment of cooperation agreements.     

Do subsidies have positive impacts on R&D and innovation activities at the firm level?

In this paper we analyze whether and how “research” and “development” subsidies influence private R&D activity. Our empirical results show that “research” subsidies stimulate R&D spending within firms while “development” subsidies substitute such spending. At the theoretical level we find empirical support for the market failure argument that private R&D expenditure is best stimulated in areas where the gap between the social and the private rate of return to R&D is high. A policy implication is that technology programs should support research projects in the private sector in order to stimulate to more R&D.     

ASYMMETRIC EFFECTS OF THE BUSINESS CYCLE ON FIRM-FINANCED R&D

Abstract

Business cycles might affect the ability of firms to finance R&D, since firms rely on cash flow to finance most R&D activities. However, business cycles also influence the incentive to perform R&D. The opportunity cost of funds devoted to R&D falls during recessions, since the return on production will likely be lower than during an expansion. During recessions, this provides firms with an incentive to redistribute an existing pool of funds away from production and towards R&D projects. The changes in the size and distribution of the pool may also be asymmetric across the business cycle. For example, cash-flow constraints are more likely to bind during recessions than expansions. This paper finds strong evidence for the cash-flow effect, but not the opportunity-cost effect. This means that R&D is pro-cyclical, but smoothing out the business cycle will actually lead to reduced R&D, since the duration of expansions exceeds the duration of recessions.     

R&D competition between public and private sectors

We investigate a mixed market where a welfare-maximizing public research institute competes against profit-maximizing private firms. We investigate R&D competition by using a standard model of patent races where each firm chooses both its innovation size and R&D expenditure. We find that the innovation size (R&D expenditure) chosen by the public institute is too small (too large) from the viewpoint of social welfare, respectively, and so the government should control the public institute appropriately. We also discuss the welfare implications of privatization of public research institutes.     

Role of human resource practices in absorptive capacity and R&amp;D cooperation

This paper reconceptualises absorptive capacity as a strategic human resource construct and analyses its role in determining R&D cooperation and innovation in firms. In spite of widespread consensus on the role of absorptive capacity in innovation, the literature has so far concentrated only on traditional R&D and human capital based indicators of absorptive capacity. Furthermore, most firm-level studies investigating this relationship are cross-sectional in nature and there is need for longitudinal evidence. Employing the IAB Establishment Panel Survey on about 1200 private sector establishments in Germany during 2007–2011, we apply a structural model that links firms’ human resource practices, R&D collaboration strategies and finally their innovation outcome. Findings from the first stage of the empirical analysis suggest that adoption of employment practices positively affects horizontal, institutional and consulting-based R&D cooperation, while compensation programs positively affect only horizontal R&D cooperation. In the second stage, the effect of cooperative R&D conditioned upon human resource practices on innovation performance is examined. Results indicate that firms having institutional and consulting-based R&D cooperation relationships are more often associated with higher incremental product, process and new-to-market innovation, whereas the effect is relatively weaker in case of horizontal R&D cooperation.     

An empirical investigation of the determinants of R&D cooperation: An application of the inverse hyperbolic sine transformation

This paper applies the Inverse Hyperbolic Sine (IHS) transformation to explore the variables that determine a firm’s R&D collaborative expenditure. The IHS specification is used to overcome the inconsistencies deriving from non-normality of error terms which are typical in censored data. This represents a novelty in R&D studies. The sample employed refers to 1231 Italian firms where the dependent variable under investigation is strongly skewed by the zero values and by the extreme observations. The results show that standard errors are smaller in the IHS model than in the more common logarithmic one. The analysis also shows that size and public grants are effective in determining the level of cooperative R&D expenditure. Absorptive capacity, outsourcing inputs or services externally and the industry, also play an important role.     

Value maximizing hurdle rates for R&D investment

We show that the value maximizing hurdle rate for research and development (R&D) investments among private firms operating in a market setting is less than for conventional investments despite the fact that R&D has development risk. Because development risk arises only during R&D, entrepreneurs control this risk by deferring or pursuing R&D depending upon profitability. This risk management moderates downside loss and encourages upside gain which increases the value attraction of R&D and decreases the value maximizing hurdle rate below that of conventional investment.