The differential effects of public R&D support on firm R&D: Theory and evidence from multi-country data

This paper aims to evaluate the effects of various forms of public research and development (R&D) support on firms’ incentives to invest in R&D. First, in order to identify potential channels through which public R&D support influences firm R&D, a formal model of firm R&D with public R&D support is developed and analyzed. Four potential channels are identified: the technological-competence-enhancing effect, the demand-creating effect, the R&D-cost-reducing effect and the (project) overlap (or duplication) effect. These multiple channels indicate that it is difficult to evaluate the aggregate effect of public R&D support and that there are differential effects of public R&D support on firm R&D, depending on various firm- or industry-specific characteristics. Second, the differential effects of public R&D support are empirically tested using unique firm-level data for nine industries across six countries. Public support tends to have a complementarity effect on private R&D for firms with low technological competence, for firms in industries with high technological opportunities and for firms facing intense market competition. In contrast, firms with high technological competence and firms that have enjoyed fast demand growth in recent years show a crowding-out effect, and firm size and age do not show any discernible differential effect.     

The effects of public support schemes on small and medium enterprises

In this paper we will investigate the effects of direct grants and tax incentives on recipient small and medium enterprises (SMEs). Direct grants and tax incentives are two different public instruments used to correct market failure and facilitate innovation through lowering the cost of R&D. Although large and small firms innovate in different ways, so far limited empirical evidence has been reported with respect to the effectiveness of public R&D instruments for SMEs. Our data suggests that direct subsidies used alone or with tax incentives strengthen the R&D orientation of the SME as well as some aspects of innovation output and absorptive capacity. Although the effects of policy measures are significant when comparison is made to firms that did not use any of the two instruments, not much difference is found when users of direct grants are compared to those who used both the grants and the tax incentives. This result indicates the existence of limitations in the use of tax incentives by SMEs, and thus suggests that subsidies may be the primary instrument in SMEs.     

How do firm characteristics affect behavioural additionalities of public R&D subsidies? Evidence for the Austrian transport sector

Interest of STI policies to influence the innovation behaviour of firms has been increased considerably. This gives rise to the notion of behavioural additionality, broadening traditional evaluation concepts of input and output additionality. Though there is empirical work measuring behavioural additionalities, we know little about what role distinct firm characteristics play for their occurrence. The objective is to estimate how distinct firm characteristics influence the realisation of behavioural additionalities. We use survey data on 155 firms, considering the behavioural additionalities stimulated by the Austrian R&D funding scheme in the field of intelligent transport systems in 2006. We focus on three different forms of behavioural additionality—project additionality, scale additionality and cooperation additionality—and employ binary regression models to address this question. Results indicate that R&D related firm characteristics significantly affect the realisation of behavioural additionality. R&D intensive firms are less likely to substantiate behavioural additionalities, while small, young and technologically specialised firms more likely realise behavioural additionalities. From a policy perspective, it may be concluded that direct R&D promotion of firms with a high R&D intensity may be misallocated. Attention of public support should be shifted to smaller, technologically specialised firms with lower R&D experience. The findings deliver important insights into interactions of public R&D support and R&D behaviour of firms operating in the Austrian transport sector, bearing significant implications for future policy designs.     

The R&;D and productivity relationship of Korean listed firms

This study analyzes the relationship between R&D investment and the productivity of Korean R&D-engaged firms. An interdependent chain of equations including the propensity to invest, R&D investment and productivity are estimated in a multi-step procedure accounting for selectivity and simultaneity biases. Using Korean firm level panel data of listed firms from 1986 to 2002, we find four main empirical results. First, there is a two-way causal relationship between R&D investment and productivity for Korean listed firms. Second, Chaebol firms were associated with lower R&D growth as well as lower labor productivity growth in comparison to non-Chaebol firms. Third, there was a substantial reduction in growth rates both in R&D investment and labor productivity in 1997-1998, immediately following the Asian financial crisis. Fourth, considering the positive feedback effect from productivity growth to R&D growth, a decrease in R&D investment growth after the Asian financial crisis should have been harmful by further decreasing productivity growth.     

Corporate cash holdings and total factor productivity – A global analysis

Studies concerning total factor productivity (TFP) have investigated the effect of TFP on economic growth from a country-level perspective, which is a critical issue in the macroeconomics field. Few studies have examined how corporate financial decisions influence TFP from a firm-level perspective. Specifically, no extant studies have investigated how cash holdings affect firm productivity. This study utilizes data for firms in 65 countries during 1993–2017 to investigate the effect of cash holdings on TFP from a corporate perspective. The findings show that firms with higher cash holdings can enhance TFP. The results hold after considering endogenous problems, financial constraints, financial crises, corporate governance, institutional quality, and financial development as well as various robustness tests. Furthermore, we examine whether firms consistently invest their cash holdings into research and development (R&D) expenditures enhances firm productivity. The evidence indicates that higher cash holdings lead to steady increases in R&D expenditure, which improves firms’ TFP.     

R&D subsidies and productivity in eastern European countries

This paper shows that R&D subsidy policies at the European Union (EU) and national levels stimulated labor productivity in Central and Eastern European countries (CEEC) in the years after their entry to the EU. However, the average impact of national funding on labor productivity was higher for countries in the Western control group than in the CEEC sample. EU R&D subsidies compensated the CEEC in part for the greater innovation impact of Western economies. Although they crowded out some R&D subsidies by local governments at the country level, the EU subsidies crowded in many national and local subsidies at the firm level. Local/regional state innovation aid to enterprises encouraged no increase in labor productivity in all but one of the sample CEEC countries. These impacts are assessed in a sequential structural econometric model estimated using Eurostat’s collection of Community Innovation Surveys covering the years 2006–2014.     

Intangible investment in people and productivity

Organizational activity, information and communication technology work, and research and development (R&D) can be classified as work that creates intangible capital. We measure the returns to these three types of labor input by accounting for differences in their productivity compared with other labor inputs using Finnish firm-level data from 1998 to 2008. We apply a novel idea to use hiring as one proxy for productivity and demand shocks. We find that organizational workers increase total factor productivity and improve the profitability of high-productivity firms. R&D workers account for a large share of intangible capital; however, the returns to R&D are low. Investments in organizational competence are more likely to result in more rapid productivity growth. Firms with performance-related pay or domestically owned firms with extensive foreign activities have been among the highest performers with respect to the use of organizational work.     

Globalisation,industrial diversification and productivity growth in large European R&D companies

This paper aims to assess the impact of both geographic and industrial diversification of economic activities on the productivity performance of large European R&D Multinational Enterprises (MNEs). Based on the worldwide subsidiaries of these firms, we measure the performance of the firms according to their level of industrial diversification and globalisation that we proxy with the presence and importance of subsidiaries in the EU, North America and Asia–Pacific regions. The sample consists of large R&D firms that represent about 80 % of total European R&D. In general, the results indicate a positive impact from globalisation on firms’ R&D productivity, especially in the US, while a negative impact for industrial diversification is found.     

PUBLIC R&D POLICIES AND PRIVATE R&D INVESTMENT: A SURVEY OF THE EMPIRICAL EVIDENCE

The importance of R&D investment in explaining economic growth is well documented in the literature. Policies by modern governments increasingly recognise the benefits of supporting R&D investment. Government funding has, however, become an increasingly scarce resource in times of financial crisis and economic austerity. Hence, it is important that available funds are used and targeted effectively. This paper offers the first systematic review and critical discussion of what the R&D literature has to say currently about the effectiveness of major public R&D policies in increasing private R&D investment. Public policies are considered within three categories, R&D tax credits and direct subsidies, support of the university research system and the formation of high‐skilled human capital, and support of formal R&D cooperations across a variety of institutions. Crucially, the large body of more recent literature observes a shift away from the earlier findings that public subsidies often crowd‐out private R&D to finding that subsidies typically stimulate private R&D. Tax credits are also much more unanimously than previously found to have positive effects. University research, high‐skilled human capital, and R&D cooperation also typically increase private R&D. Recent work indicates that accounting for non‐linearities is one area of research that may refine existing results.     

Corporate R&D and firm efficiency: evidence from Europe’s top R&D investors

The main objective of this study is to investigate the impact of corporate research and development (R&D) activities on firm performance, measured by labour productivity. To this end, the stochastic frontier technique is used on a unique unbalanced longitudinal dataset comprising top European R&D investors over the period 2000–2005. In this framework, this study quantifies technical inefficiency of individual firms. From a policy perspective, the results of this study suggest that if the aim is to leverage firms’ productivity, the emphasis should be put on supporting corporate R&D in high-tech sectors and, to some extent, in medium-tech sectors. On the other hand, corporate R&D in the low-tech sector is found to have a minor effect in explaining productivity. Instead, encouraging investment in fixed assets appears important for the productivity of low-tech industries. Hence, the allocation of support for corporate R&D seems to be as important as its overall increase and an ‘erga omnes’ approach across all sectors appears inappropriate. However, with regard to technical efficiency, R&D intensity is found to be a pivotal factor in explaining firm efficiency and this turns out to be true for all industries.     

Fostering product innovation: Differences between new ventures and established firms

This study combines insights from the entrepreneurship, competency-based view and innovation policy literature to analyze the relationships among different types of public incentives designed to foster innovation and product innovation at both new ventures and incumbent firms. To test our hypotheses, we ran a system of regression models on a cross-national sample comprised of 5238 firms from 29 European countries and found a different pattern for new ventures and incumbents. Our results suggest that support for attendance or participation in trade fairs and networking with other companies are the most effective methods of promoting product innovation for new ventures. However, for incumbent firms, we found that the most effective policies consisted of tax reduction for R&D expenditures and subsidies for acquiring buildings or other infrastructure(s) for innovation activities. This distinction prompts interesting insights related to theory development in research on entrepreneurship and innovation policy.     

Are innovation and R&D the only sources of firms’ knowledge that increase productivity? An empirical investigation of French manufacturing firms

The economic literature presents knowledge accumulation as one of the most important characteristics of innovation. The accumulation of knowledge arises from complex and dynamic interactions between a firm??s own internal capacity and external expertise. Research and development (R&D) remains important in the innovation process, but it must be integrated with knowledge from other sources, such as training and knowledge capitalization. This paper investigates the relationship between such knowledge sources and the productivity of French firms. Using asymptotic least squares, a Cobb-Douglas function including R&D, innovation, training expenditure and ISO 9000 certification is estimated for 1,213 French manufacturing firms. Our results show that innovation, training and ISO 9000 certification have a positive and significant impact on firms?? productivity.     

An analysis of firm-level innovation strategies in the US biotechnology industry

This study examines factors that may affect innovation strategies and performance of firms in the biotechnology industry. Specifically, differences between factors common to firms with high R&D intensity and those to firms with low R&D intensity are investigated. Biotechnology firms with relatively higher levels of R&D intensity attribute their innovation performance to research-based innovation factors and strategies such as strengthening their own research capabilities, entering into research collaborations with universities, industry leaders and other biotech firms, and licensing their technology. These strategies can be summarized as alignment within the industry. Firms with relatively lower R&D intensity have a hybrid focus—they invest in R&D but may also have products on the market. These firms attribute their innovation performance more so to production-based innovation factors and strategies such as gaining market access and maintaining connections with customers. Their strategy focuses on competitiveness, marketing, and distribution channels, while not ignoring the importance of a strong research base and the need to advance technologically. In a sense, strategies employed to achieve successful innovation reflect the stage of innovation in which a firm is operating for a particular product or process.     

From R&D to Productivity Growth: Do the Institutional Settings and the Source of Funds of R&D Matter?

This paper presents estimates of the long-term impact of various sources of knowledge (R&D performed by the business sector, the public sector and foreign firms) on multifactor productivity growth of 16 countries from 1980 to 1998. The main results show that the three sources of knowledge are significant determinants of long-term productivity growth. Further evidence suggests that several factors determine the extent to which each source of knowledge contributes to productivity growth. These factors are the absorptive capability, the origin of funding, the socioeconomic objectives of government support, and the type of public institutions that perform R&D.     

Making sense of innovation by R&D and non-R&D innovators in low technology contexts: A forgotten lesson for policymakers

This paper attempts to use an integrated theory based on the framework of a firm's internal and external sources of knowledge to analyze how R&D activities differ in innovation from non-R&D activities, especially in the context of low and medium-low tech (LMT) sectors where most of the firms are SMEs. Simultaneously, the paper also explores the key differences between R&D and non-R&D innovators. The empirical analysis is based on a representative panel of 2023 Spanish manufacturing firms from the Spanish Ministry of Industry for 2005 and 2006. Innovation in product and process is explained using non-R&D variables such as marketing, design or the hiring of tertiary degree employees. Only innovation in product is explained by R&D expenditures. Regarding innovation in process, the R&D variables work in a few specific cases. Therefore, innovation can be explained using non-R&D variables. The firms with more internal resources, those which conduct R&D activities, present a better absorptive capacity (AC) and this leads them to engage in cooperation agreements and to access external flows of knowledge. The paper has important implications for policymakers due to the fact that most policies for R&D are based just on R&D programmes.     

Strategies for innovation and productivity in Japan and America

The purpose of this paper is to describe the types of organizational settings in the West that have been especially conducive for innovation and productivity. Then the same predictive factors are tested for a sample of 44 Japanese factories in order to investigate the extent to which similar relationships are found in both nations.The results suggest that R&D and the innovation function is handled somewhat differently in Japan, but that the consequences of the scale of operations for innovation and productivity are basically similar. In general, large scale operations are more productive, but less innovative in both nations. However, emphasis on specialized R&D seems to be more characteristic of U.S. industry. Many small firms in Japan achieve innovative performances with relatively little expenditure on R&D per se. However, to what extent the Japanese formula which has worked in the past will continue to work in the high technology era of the 1980s remains an open question.     

Size and value effects in high-tech industries: The role of R&D investment

We use monthly US stock data over 55 years from 1962 to 2017 to show that the R&D intensity at firms adds another important dimension to the size and value effects in describing stock returns, especially for small high-tech firms. A trading strategy that double sorts on R&D intensity and size or book-to-market ratio outperforms a simple small-minus-big (SMB) or high-minus-low (HML) strategy in producing higher and more significant portfolio returns. The most profitable schemes involve triple sorts by size, BM, and R&D intensity: the payoffs of buying high-BM/R&D-Active portfolio and selling low-BM/R&D-Inactive portfolio in the small-size/high-tech group and that of buying high-tech/high-BM and selling low-tech/low-BM in the small-size/R&D-active group generate a return of more than 2% on a monthly basis. Our results are robust to alternative classification method of assigning stocks in portfolios.     

Sarbanes-Oxley wealth effects: focus on technology firms

We evaluate the shareholder wealth effects surrounding the passage of the Sarbanes-Oxley Act (SOX). While other studies have also measured wealth effects, none has separately examined technology firms. We discuss the unique characteristics of technology firms and assess whether technology firms are differentially affected. Our results show the portfolio of 218 technology firms experienced significantly more favorable wealth effects than the portfolio of 940 non-technology firms in response to events indicating stringent reform legislation. The cross-sectional analyses suggest that board independence, growth expectations, and R&D expenditures are influential factors in the differential stock price response of technology firms. Across our full sample of 1,158 firms, we find that wealth effects are less favorable for firms that likely will incur high compliance costs and more favorable for firms that are expected to benefit from improved governance and improved transparency.     

Home market effects with endogenous costs of production

In a standard imperfect competition model, we endogenize the costs of production of firms in the increasing returns sector (IRS) via process R&D. We show that firms in the larger region in terms of demand invest more in R&D (i.e.: they are bigger in size and have lower marginal costs) than firms in the smaller region, since the former exploit larger economies of scale in production to pay for the costs of R&D. As a result, when the return on R&D is high, the larger region does not employ disproportionately more labor nor attracts a disproportionately larger share of firms in the IRS in relation to share of demand it hosts, i.e.: negative home market effects (HMEs) in employment and in the number of firms. When this occurs, only partial agglomeration of the IRS in the larger region is sustainable in equilibrium. Even so, the larger region always runs trade surplus in the IRS, i.e.: HME in trade patterns.     

Cooperative R&D ventures: Strategic behavior versus transactional efficiency

This paper examines a sample of 48 cooperative R&D ventures announced in the period 1983–1990 to determine their impact on the stock price of the announcing firms. It finds that the venturing firms earn statistically significant positive abnormal returns over periods surrounding the announcement date. These gains are greater than those that result from announcements of increases in expenditures on in-house R&D. The cross-sectional analysis reveals that abnormal returns to the venturing firms are independent of industry concentration, larger in international ventures than in domestic ventures, and equal in cooperative agreements and equity joint ventures. These results support the transactional efficiency perspective of cooperative R&D ventures and suggest that the relaxation of antitrust laws as they apply to cooperative R&D ventures in 1984 is a welfare-improving policy.