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.     

Firm size and types of innovation

We propose a general theory of innovation that illustrates the relative benefits of performing process versus product R&D when firm size is endogenous. A firm's size, scope, and R&D portfolio are shown to reflect the same underlying characteristic of the firm, namely manufacturing efficiency. We demonstrate that efficient firms become larger, have greater scope, and perform more of both process and product R&D. In light of decreasing returns to R&D, this implies small firms obtain more product innovations per dollar of R&D than large firms, which is consistent with evidence we present that small firms are more innovative than large firms as they obtain more patent counts and citations per dollar of R&D.     

Timing of innovation policies when carbon emissions are restricted: An applied general equilibrium analysis

This paper studies the timing of subsidies for emissions-saving research and development (R&D) and how innovation policy is influenced by a carbon tax. We develop a dynamic computable general equilibrium (CGE) model with both general R&D and specific emissions-saving R&D. We find two results that are important when subsidizing emissions-saving R&D in order to target inefficiencies in the research markets. First, the welfare gain from subsidies is larger when the carbon tax is high. This is because a high carbon tax raises the social value of the emissions-saving technology and that this increase in value is not fully appropriated by the private firms. Secondly, the welfare gain is greater when there is a falling time profile of the rate of subsidies for emissions-saving R&D, rather than a constant or increasing profile. The reason is that knowledge spillovers are larger in early periods.     

What are good R&D investment strategies for leaders and followers?

Research and development (R&D) investment affects the growth of firms in the same industry differently according to their technological positions. This study empirically investigates differences in how R&D investment influences firm growth between technological leaders and followers. Additionally, this study investigates the moderating effects of complementary assets and market competition on the relationship between R&D investment and firm growth. Using a sample of 2322 observations from 492 firms in the U.S. chemical and allied products industry for the period 2000–2009, we show that an increase in R&D investment leads to greater firm growth for technological followers than for technological leaders. We also find that the moderating effects of complementary assets and market competition vary depending on whether a firm is a technological leader or follower.     

A simple theory and evidence on the determinants of firm R&D

This paper derives a simple, but informative, model of firm R&D to figure out key factors that determine firm R&D effort. The model suggests a demand-pull, technology-push theory of R&D by showing that a firm's profit-maximizing R&D expenditure is determined jointly by both demand-side factors and technology-side factors. The former includes demand size (firm sales) and consumer preference over quality and price and the latter includes R&D cost structure or the production-cost effect of product R&D and firm-specific technological competence. In addition, the model shows that other things being equal, the stock of exogenous technological knowledge, including the firm's previously accumulated technological knowledge, relevant to current R&D which is negatively related with current R&D effort. An empirical analysis of firm R&D intensities and technological capabilities of more than 1600 firms in nine industries across six countries provides supportive evidence for the theory. Further, the theory implies that R&D intensity or the R&D-to-sales ratio is independent of firm size unless firm size affects technological competence and that given consumer preference and R&D cost structure facing all firms in the same industry, the distribution of firm-specific technological competence among firms determines the distribution of firm R&D intensities within the industry.     

R&D expenditures and firm growth – is small beautiful?

ABSTRACT

This paper examines how efficiently different groups of firms use their R&D expenditures. To this end, it investigates how the empirical relationship between firms' R&D expenditures and their sales growth varies with different values of firm size, firm age, and the number of firms in the respective industry. Using panel data for Switzerland ranging from 1995 to 2012, the paper finds that smaller, more mature firms show a more positive relation between R&D expenditures and sales growth than both relatively larger or younger firms. The paper argues that, on the one hand, these firms can benefit from various small size advantages in the R&D process, such as more motivated researchers, caused by a stronger connection to the firm's fate. On the other hand, these firms can also benefit from a well-established R&D department that allows absorbing the latest technological developments. The paper further finds that industries consisting of many small firms show a more positive relation between R&D expenditures and sales growth than industries consisting of only a few large firms. The intuition behind this result is that industries consisting of many small firms imply more independent innovative trials, which then together result in a higher probability of discovering successful innovations. In sum, the paper finds that groups consisting of a large number of small, more mature firms spend their R&D in the most efficient way.     

Public R&D subsidies,outside private support,and employment growth

In the aftermath of the passage of the American Recovery and Reinvestment Act of 2009, the employment effects of public subsidies have been scrutinized because of new emphasis on public accountability and transparency. In this paper, we investigate conditions in which public subsidies of research and development (R&D) in small firms stimulate employment growth. We find, based on an empirical analysis of employment growth induced by US Department of Defense Small Business Innovation Research program awards, that the stimulated employment growth is greater under two conditions: one, the presence of outside investors providing additional funding for the R&D and, two, when an exceptional amount of intellectual property is created by the publicly subsidized R&D. In addition to outside investors, other firms that make commercial agreements with the subsidized firm appear important for the employment growth of the subsidized firm. Cooperation between the small business doing the R&D and other firms is an important determinant of the commercial success of the technologies created with the support of public funds.     

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.     

Impact of firm size and industry type on R&D efficiency throughout innovation and commercialisation stages: evidence from Korean manufacturing firms

Technological innovation through R&D is a critical element in enhancing and fostering firm performance. In particular, measurement of R&D efficiency throughout the innovation and commercialisation stages is important. However, almost of R&D efficiency-related studies assumed that R&D is a single stage. This study aims at analysing relative efficiency scores throughout the stages of the R&D process using a two-stage data envelopment analysis (DEA) model with a sample of 1039 Korean manufacturing firms. Based on our preliminary results, this study was extended by comparing subsample groups categorised by firm size and industry type. The key findings include: (1) firms show imbalanced R&D efficiency throughout the two stages and (2) R&D efficiency is different by firm size and industry type. The empirical results and findings may assist policy- and decision-makers to enhance R&D efficiency at the firm level. Moreover, introduction of the two-stage DEA model and comparative analysis methods to firm-level data contributes to scholars.     

Research Joint Ventures with Asymmetric Spillovers and Symmetric Contributions

The paper proposes a new type of R&D cooperation between firms endowed with asymmetric spillovers, which we call symmetric Research Joint Venture (RJV) cartelization, based on reciprocity in information exchange. In this setting, firms coordinate their R&D expenditures and also share information, but such that the asymmetric spillover rates are increased through cooperation by equal amounts. It is found that this type of cooperation reduces R&D investment by the low spillover firm when its spillover is sufficiently low and the spillover of its competitor is sufficiently high. But it always increases the R&D of the high spillover firm, as well as total R&D (and hence effective cost reduction and welfare). A firm prefers no cooperation to symmetric RJV cartelization if its spillover rate is very high and the spillover rate of its competitor is intermediate. The profitability of symmetric RJV cartelization relative to other modes of cooperation is analyzed. It is found that symmetric RJV cartelization constitutes an equilibrium for a very wide range of spillovers, namely, when asymmetries between spillovers are not too large. As these asymmetries increase, the equilibrium goes from symmetric RJV cartelization, to RJV cartelization, to R&D competition, to R&D cartelization.     

The effectiveness of R&D subsidies

In this paper, the effectiveness of R&D subsidies is analyzed in an oligopolistic model that we apply to the cases of international R&D competition and cooperation. We find that the existence of asymmetric information among firms on whether a rival (or partner) is being subsidized or not may play a key role in explaining whether subsidies are effective or not in increasing R&D investments. In particular, it is shown that if the existence of the subsidy is made public (e.g. because strict information release regulation about R&D subsidies is enforced) and depending on the strategic relationship between the firms’ R&D efforts, an R&D subsidy could even hurt the subsidized firm.     

Firm's objective function and product and process R&D

Firms undertake different kinds of R&D activities. They do product R&D (R&D aimed at improving the quality of existing products, and creating new products). They also do process R&D (R&D aimed at lowering the cost of making existing and new products). Moreover, firms often do both product and process R&D simultaneously. As far as the objective of firms is concerned, this need not be limited to profit-maximization only. Rather, firms may have a broader objective, where they care about profits as well as consumer surplus. This paper studies effects of a firm having a general objective function (that takes into consideration both profits and consumer surplus) on its product and process R&D choices, and corresponding implications.I consider product and process R&D choices of firms in an infinite horizon set-up with discrete time. Firms in my framework can simultaneously do both product and process R&D in every period, face a discrete-choice model of consumer demand with vertical product differentiation, and maximize a discounted, weighted sum of their profits and consumer surplus over the infinite time horizon.I show how process and product R&D differ from each other in my framework, and the role of a firm's objective function in this regard. I compare process and product R&D choices across firms that differ in their objective function, and illustrate effects of providing general R&D subsidies (subsidies given for any R&D, regardless of whether it is product or process R&D) to firms. I also characterize how in my framework, the choice of process R&D in total R&D — R&D composition — by an individual firm varies over time, and how process and product R&D choices, process and product R&D productivity, and the choice of R&D composition vary across firms that differ in size but are otherwise similar.     

Subsidizing cooperative and noncooperative R&D in duopoly with spillovers

Comparing the effect on private R&D investments of allowing firms to cooperate in R&D with that of providing R&D subsidies reveals that in general the latter policy is more effective than the former in promoting R&D activity. Analyzing the implementation of both policies simultaneously reveals that subsidizing cooperative and noncooperative R&D leads to the same market outcome. The preferred R&D-stimulating policy is to subsidize optimally an agreement according to which firms only share the outcomes of their independent research.     

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.     

Gradual Product Replacement,Intangible-Asset Prices and Schumpeterian Growth

The paper develops a general-equilibrium model of scale-invariant Schumpeterian (R&D-based) growth. New higher-quality products are discovered through stochastic and sequential R&D races in each industry. The market share of an R&D race winner increases gradually and is governed by an exponential deterministic process. The introduction of gradual (as opposed to instantaneous) product replacement sheds more light on the effects of the rate of technology diffusion on long-run growth and on long-run dynamics of intangible asset prices. An economy with faster product diffusion rates experiences higher long-run innovation rates, faster transitional growth, and is populated by younger firms. As the typical firm becomes older, the earnings yield (i.e., the inverse of the price earnings (P/E) ratio) increases and expected earnings growth declines. Younger firms have lower earnings, lower market shares, but higher P/E ratios and higher expected earnings growth associated with their higher potential market growth.An electronic version of the paper is available at http://bear.cba.ufl.edu/dinopoulos/research.html.     

Pollution abatement with disruptive R&D investment

This paper examines a model of investment in abatement where polluting firms produce output while investing in R&D. This investment, however, increases production costs, thus disrupting first-period output. We identify three equilibrium profiles where firms choose to either: (1) invest in R&D alone (thus rationalizing a common modeling assumption in the literature); (2) produce output alone; or (3) engage in both activities. We evaluate how the emergence of each result is affected by the market structure in which firms compete and by the severity of spillover effects. We then measure welfare levels in each equilibrium profile. Overall, we show that firms endogenously choose to focus on R&D only when the market is concentrated and spillover effects are small. In other type of industries, our findings indicate that firms may focus on output production or engage in both activities under relatively large conditions.     

STRATEGIC R&D AND NETWORK COMPATIBILITY

We analyse the effects of network externalities in strategic R&D competition. We present a model of two firms competing with R&D investments and prices in a differentiated consumer market. Buyers form firm-specific networks which can be compatible. A high degree of compatibility and large spillovers moderate price competition due to weak strategic value of firm-specific networks and R&D investments, respectively. Asymmetry in product qualities brings out network effects that cancel out in conventional symmetric settings. The lower quality firm increases R&D and decreases its price as spillovers or network compatibility is increased. This happens when R&D and firm-specific network size have high strategic value.     

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.     

Noncooperative versus cooperative R&D with endogenous spillover rates

This paper deals with a general version of a two-stage model of R&D and product market competition. We provide a thorough generalization of previous results on the comparative performance of noncooperative and cooperative R&D, dispensing in particular with ex-post firm symmetry and linear demand assumptions. We also characterize the structure of profit-maximizing R&D cartels where firms competing in a product market jointly decide R&D expenditure, as well as internal spillover, levels. We establish the firms would essentially always prefer extremal spillovers, and within the context of a standard specification, derive conditions for the optimality of minimal spillover.     

High-growth versus declining firms: the differential impact of human capital and R&D

We provide evidence that both human capital and R&D increase the likelihood that a firm will be a high-growth firm in the industry. However, different from human capital, being an R&D active firm also increases the probability of substantial decline or failure, underscoring the risky nature of innovation. Quantile regression results show that, different from R&D, human capital is growth-enhancing for all firms, hence also those located in the lower quantiles of the distribution of growth rates across firms.