Governance and effects of public R&D subsidies: Evidence from China

This study examines the effects of public research and development (R&D) subsidies and the governance of such subsidies on firm productivity based on the analysis of a firm-level panel dataset between 1998 and 2007 in China. It is found that public R&D subsidies tend to support more productive firms and the productivity of these government-backed firms is improved further after they get the government support. Less attention is paid to the observable or measurable performance measurements in ex-ante project selection, and the ex-post effects are stronger when the governance of the public R&D subsidies becomes more decentralized due to an exogenous policy change. In other words, better decentralization of governance is associated with more pronounced effects of R&D subsidies. Identification concerns are addressed with various approaches to confirm the treatment effect of public R&D subsidies and the governance of such subsidies.     

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.     

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.     

Environmental regulations in private and mixed duopolies: Taxes on emissions versus green R&D subsidies

In this article, we compare two kinds of environmental regulations—emissions taxes and green R&D subsidies—in private and mixed-duopoly markets in the presence of R&D spillovers. We show that a green R&D subsidy is better (worse) than an emissions tax when the green R&D is efficient (inefficient), irrespective of R&D spillovers, whereas the existence of a publicly owned firm encourages the government to adopt a subsidy policy. We also show that the optimal policy choice depends on R&D efficiency and spillovers. In particular, when green R&D is inefficient and the spillover rate is low (high), the government should choose an emissions tax and (not) privatize the state-owned firm. When green R&D is efficient, however, an R&D subsidy is better, but a privatization policy is not desirable for society, irrespective of spillovers.     

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.     

Optimal regulation of technical progress in natural monopolies with asymmetric information

The focus of this paper is to characterize regulatory mechanisms for natural monopolies to provide for optimal technical progress when information is asymmetric. We model a Bayesian-Nash game where the monopolist has private knowledge of the cost-reducing effects of R&D investment to generate process innovations. In the first case, a price-regulated, profit-maximizing firm whose R&D level is unobservable sets its R&D level efficiently to maximize profits at the output level chosen by the firm. However, the level of technical progress achieved by the firm in this case is too high from the regulator's point of view since, in the second-best regulated solution of interest, the regulator has to provide for the R&D expenditures, assumed sunk, as well as for information rents transferred to the firm. In a second case, it can be shown that if the regulator can observe and set limits on the firm's investment in R&D, social welfare is improved, even though the regulated investment level is no longer efficient at the output level chosen by the firm. The reason for the welfare improvement is that losses in consumer surplus due to a decrease in output and an increase in the price are offset by a decrease in information rents and R&D costs transferred, causing the social costs of public funds to fall. Received: 31 July 1994 / Accepted: 15 January 1999     

ASSESSING THE EFFECT OF PUBLIC SUBSIDIES ON FIRM R&D INVESTMENT: A SURVEY

This survey examines the empirical literature on the relationship between public R&D subsidies and private R&D investment over the past five decades. The survey reveals a considerable heterogeneity of empirical results that cannot be explained fully by methodological issues. We aim to provide further explanations of the possible causes of that heterogeneity. In particular, we emphasise a set of issues that, in our view, are critical to understanding the potential effect of public R&D subsidies on private R&D spending. Special attention is paid to the dynamic aspects and composition of firm R&D, the constraints faced by the firm (such as financial constraints), and the amount and source of public subsidies. None of these issues have been investigated in depth. We formulate a set of research assumptions to guide future empirical research in this field.     

Adoption,diffusion, and public R&D

This paper studies the impact of public RD&D (Research, Development, and Demonstrations) on the market penetration of a new government-sponsored technology. First, the technology adoption behavior of a firm under uncertainty is reviewed. Secondly, the diffusion of the new technology in a competitive industry that benefits from learning-by-doing is analyzed. Numerical simulations are conducted to determine the effect that variations in government R&D policies have on the rate and level of market penetration. Productive R&D investments affect thelevel of diffusion and R&D demonstrations therate of diffusion.     

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.     

Impact assessment based sectoral balancing in public R&D project portfolio selection

Government funding agencies spend significant amounts of R&D funds through funding programs. While allocating funds among sectors or scientific disciplines, the Decision Maker (DM) wants to maximize the total impact by supporting R&D activities in those sectors with higher scientific, social and economic return. On the other hand, the DM wants to balance the funding budget over sectors or disciplines. In this study, we incorporate the results of “sectoral impact assessments” into the public R&D project portfolio selection (RDPPS) problem. We develop a two-stage model. In the first stage, we make sectoral budget allocation decisions to maximize the total impact of the budget while ensuring a relative balance among sectors. In the second stage, we maximize the total score of supported projects under allocated sectoral budgets. We illustrate the proposed approach on an example problem. We show the value of the proposed approach by comparing our results with alternative policy options.     

Coordination in global R&D organizations: An examination of the role of subsidiary mandate and modular product architectures in dispersed R&D organizations

International research and development (R&D) operations require a significant amount of coordination between the headquarters and the subsidiaries in order to integrate the dispersed activities in one final product. This article explores what mechanisms multinational companies (MNCs) use to coordinate their overseas R&D units. Based on a multiple case study involving nine MNCs with overseas R&D subsidiaries of varying mandates, we find that R&D sites with high technology and/or market orientation tend to be coordinated by informal mechanisms while sites with little technology and/or market orientation tend to be coordinated by formal mechanisms. Furthermore, it appears that this relationship is strongly affected by the product’s architecture: while rather complex R&D activities are conducted at the systems level and at sites with high technology orientation, less complex R&D activities are conducted at the component level at sites with low technology and market orientation. Finally, the findings suggest that modular product architectures have a coordinating effect in global R&D activities which have the power to lower firms’ overall coordination effort. The findings bear important implications for the effective coordination of MNCs’ international R&D subsidiaries.     

The R&D knowledge base in city-agglomerations and knowledge searching in product innovative SMEs

ABSTRACT

This paper looks at the relation between the R&D knowledge base of city-agglomerations and knowledge sourcing in product innovative small and medium-sized enterprises (SMEs). The small open Belgian economy is used as a test case. The characteristics of the city-agglomeration’s R&D knowledge are posited to be instrumental for SMEs’ reliance on particular sources of information for innovation. The R&D knowledge base is studied as a multidimensional concept consisting of R&D capacity, R&D specialization and R&D diversification. A representative sample of product innovative SMEs drawn from two waves of the Community Innovation Survey between 2008 and 2012 reveals that a strong R&D capacity at city-agglomeration level favours private external information sources for innovation, but has no influence on the likelihood to rely on public sources for innovation. Accordance between specialization of the private R&D knowledge base and the SME’s activities positively influences the use of clients as information sources for innovation, whereas under these circumstances supplier responsiveness turns out to be less frequently solicited for. A more diversified private R&D environment reduces the reliance on universities and public research organizations as information sources for innovation. A public R&D knowledge base specialized in natural sciences or engineering favours information sources from universities.     

Impact of R&D and Technology Diffusion on Productivity Growth: Empirical Evidence for 10 OECD Countries

This paper examines the empirical evidence on the impact of performed R&D and of R&D embodied in intermediate and capital goods on productivity performance in 10 major OECD countries over the last two decades. To quantify intersectoral and international technology flows, industry-level embodied R&D variables were constructed from an input–output (IO) R&D embodiment model. The productivity variables used are discrete Divisia growth indexes of total factor productivity (TFP), which were estimated from an IO growth accounting model. The results from pooled regressions indicate that the rates of return of the R&D variables were positively significant and increasing in the 1980s. In particular, embodied R&D is an important source for TFP growth in services, indicating very high social returns of the flows of capital-embodied technology into this sector. Moreover, the information and communi-cation technology (ICT) cluster of industries played a major role in the generation and cquisition of new technologies at the international level.     

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.     

Innovation dynamics and fiscal policy: Implications for growth,asset prices,and welfare

We study the equilibrium implications of different fiscal policies on macroeconomic quantities and welfare by utilizing an endogenous growth model that matches asset pricing data well. The fiscal instruments of interest are (i) subsidies to R&D expenditure, consumption and capital investment, and (ii) cuts in labor and corporate tax rates. Our equilibrium analysis provides new insights on the interplay of innovation dynamics and fiscal policy. Importantly, we find growth and welfare to be inversely related when changing R&D subsidies. However, this depends on how well the model reproduces asset pricing dynamics. Moreover, only subsidies to capital investments and cuts in the corporate tax rate have the potential to increase both growth and welfare.     

Political market failure? The effect of government unity on energy technology policy in industrialized democracies

When do governments implement technology policies that allow society to solve social problems at a lower cost? Focusing on the case of energy, we argue that in industrialized democracies, severe social problems provoke an effective technology policy response when the government is unified. A unified government can easily strike the bargains required to secure political support for new technology programs. We test this theory against data on public energy research and development (R&D) in 22 OECD countries, 1980–2006. We find that as government fractionalization increases in a country, the sensitivity of public energy R&D to wasteful energy use, which presents economic and environmental difficulties to the society, declines. The analysis reveals a new reason for ineffective technology policies and contributes to the broad literature on political market failure.     

Finland and the mobile phone industry: A case study of the return on investment from government-funded research and development

The sudden and dramatic growth of the mobile phone manufacturing sector in Finland is an interesting case study for science and technology (S&T) policy analysts. Mostly on account of the rapidity of this growth against a relatively static situation for the other sub-sectors, the Finnish economic data over the period 1990–2001 can be used without ambiguity to quantify the return of an initial public sector research and development (R&D) expenditure on the growth of a sectoral economy. Although it is apparent from the data that this economic success story is to some extent now running out of steam, the returns to date for all the participants have been astonishing. Using the Patterson–Hartmann model, which has been developed to link company-level R&D expenditure with product revenue, it is shown that government has managed to achieve a multiplier effect of about 66 on its initial R&D expenditure through initially a leveraging of business R&D expenditure (at a level of 1:3) and then the translation of the latter into an increase in gross domestic product (GDP) (at a level of 1:22). These figures are extraordinarily high, even in comparison to the multipliers obtained by large private sector companies.The keys to the success were both the vision and foresight of the Finnish R&D community, who identified cell phones as a major growth opportunity, the sharing of risk by the various role players (government, universities and industry) as can happen in an efficient national system of innovation, and finally a sustained commitment to R&D by the industry leaders. The latter has now reached a level of 3.5% of GDP (2005), which makes Finland a global leader in R&D expenditure (as a percentage of GDP). The lessons for developing countries such as South Africa, which are moving towards higher levels of R&D expenditure but within a resource constrained context, are apparent.     

Issues in Assessing the Effect of Interindustry R&D Spillovers

This paper aims to clarify three issues concerning the weighting methodol ogy generally used to evaluate interindustry R&D spillovers. These issues concern the likely nature of the spillovers estimated through different types of supporting matrices; the similarity between input–output (IO), technology flows and technological proximity matrices; and the relevance of the assumption that a single matrix can be used for different countries. Data analyses of weighting components show that technology flows matrices are in an intermediate position between IO matrices and technological proximity matrices, but closer to the former. The various IO matrices, as well as the three technological proximity matrices, are very similar to each other. The panel data estimates of the effect of different types of interindustry R&D spillovers on industrial productivity growth in the G7 countries reject the hypotheses that a technology flows matrix can be approximated by an IO matrix and that a single IO matrix can be usedfor different countries. By transitivity, the procedure that comprises using a single technology flow for several countries is not reliable. The international comparison shows that each country benefits from different types of R&D externality. In Japan and, to a lesser extent, in the US, the rate of return to direct R&D is very high and is likely to compensate for relatively weak interindustry R&D spillover effects. In the five other industrialized countries, the reverse observation is true: strong social rates of return to R&D counterbal ance the poor performances of direct R&D.     

Influence of partner diversity on collaborative public R&D project outcomes: A study of application and commercialization of nanotechnologies in the Netherlands

Several studies have indicated the importance of public R&D in the transfer and commercialization of nanotechnology. So far, few have focused on university–industry interaction and collaboration performance. In this study, we investigate the impact of technological diversity and value chain complementarity of partners on public nanotechnology R&D projects' performance. We enriched a database on the commercial outcomes of technology research projects from the Dutch Technology Foundation STW. To test our hypotheses, we selected 169 nanotechnology research projects from the database, which started in a five-year period from 1998 until 2003. Project performance was measured five years after completion of the project. Technological diversity has a U-shaped effect on the projects' commercial performance. Findings show a strong positive impact of value chain complementarity of partners on both application development and commercial performance of the projects.. The framework introduced in this study allows an evaluation of the effects of technological diversity and value chain complementarity on application development and the commercial performance of public R&D projects.     

The R&D location decision of the firm and “creative” regions—a survey

In the flurry of recent concern about and research on high technology firms and economic development, there is relatively little attention paid to the perspective of firms and their location decisions. This paper surveys the literature on the location of R&D facilities and on attempts to establish regions based on innovation and creativity. The locations of R&D facilities are constrained by the labor market for scientists and engineers. The locational needs of the firm revolve around ensuring both that professional labor will be able to be attracted to its R&D locations, and that communication (especially face-to-face communication) will be facilitated. Given these twin concerns, R&D is likely to locate primarily in large urban regions. The corresponding success of regions which hope to become major areas of spin-off and creativity is likewise constrained by the joint preferences of R&D workers, venture capital investors, and high-tech employers.