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.     

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.     

Innovation in R&D service firms: evidence from the UK

Research and Development (R&D) service firms make significant contributions to innovation in other businesses. The extant literature considers these firms a homogenous sub-group of Knowledge Intensive Business Service firms (KIBS). The objective of this study is to investigate how R&D service firms innovate and the variety of innovation practices within these firms. Employing data from semi-structured interviews with senior managers from 32 UK-based R&D service firms, we suggest that there are two different modes of innovation: in the first mode, R&D service firms innovate similarly to KIBS whose innovation is ad-hoc in nature and driven by customers’ requests; another group of R&D service firms innovate like New Technology-based Firms (NTBFs) relying more on structured in-house R&D activities.     

R&D strategy and innovation performance: the role of standardization

Firms now increasingly recognise the important role of R&D strategy in building technological advantage. However, few attempts have linked standardisation with specific R&D strategies in explaining innovation performance. To bridge this gap, this study empirically examines the relationships between R&D strategies, standardisation, and firms’ innovation performance. Based on a sample of 371 firms in China, we use structural equation modelling (SEM) and find that novelty-oriented R&D strategy generates greater accumulation of standardisation knowledge and standards diversity, while R&D openness only positively relates to this standardisation knowledge accumulation. Moreover, standardisation knowledge accumulation is positively related to both administrative and technical innovation performance, while a greater variety of standards only leads to higher administrative innovativeness. More importantly, our results reveal that accumulation of standardisation knowledge mediates the relationships between R&D novelty and administrative and technical innovation performances. Both the theoretical and practical implications that arise from these findings are discussed.     

Innovation and knowledge-intensive business service: the contribution of knowledge-intensive business service to innovation in manufacturing establishments

It is well established that knowledge-intensive business service (KIBS) firms can be innovators in their own right. It is also well established that KIBS can contribute to innovation in their client firms. This role of KIBS has been theorised, and some of the processes by which KIBS contribute to innovation have been scrutinised by way of case studies. However, there are few, if any, large-scale analyses that permit the two following questions to be addressed: (i) Do firms that use KIBS systematically introduce more innovations than those that do not? (ii) Is recourse to certain types of KIBS associated with certain types of innovation? Our survey of KIBS use across 804 manufacturing establishments in Quebec shows that KIBS contribute to their client's innovation – thereby confirming in a more general way what has been observed in case studies – but also that different types of KIBS contribute to different types of innovation.     

A comparative analysis of the change in R&D efficiency: a case of R&D leaders in the technology industry

This paper measures the cumulative change in research and development (R&D) efficiency of globally leading R&D companies in the technology industry. We use Data Envelopment Analysis /Malmquist index to analyse 49 such companies. The change in R&D efficiency is analysed by decomposing the Malmquist index into ‘catch-up’ and ‘frontier shift’ indices, and by comparing cumulative indices to those at the starting period. Those cumulative indices are obtained at both a firm and an industry level. Results indicate that the overall R&D efficiency of these globally leading R&D companies declined slightly during the period 2007–2013. At a firm level, this study determines in detail how the trend of each firm in R&D activities differs from other companies.     

Strategic timing in R&D agreements

We study the endogenous formation of R&D agreements in a R&D/Cournot duopoly model with spillovers where also the timing of R&D investments is endogenous. This allows us to consider the incentives for firms to sign R&D agreements over time. It is shown that, when both R&D spillovers and investment costs are sufficiently low, firms may find difficult to maintain a stable agreement due to the strong incentive to invest noncooperatively as leaders. In this case, the stability of an agreement requires that the joint investment occurs at the initial stage, thus avoiding any delay. When spillovers are sufficiently high, the coordination of R&D efforts becomes a profitable option, although firms may also have an incentive to sequence noncooperatively their investment over time. Finally, when spillovers are asymmetric and knowledge mainly leaks from the leader to the follower, investing as follower may become extremely profitable, making R&D agreements hard to sustain unless firms strategically delay their joint investment in R&D.     

Evidence on the impact of R&D and ICT investments on innovation and productivity in Italian firms

Both research and development (R&D) and information and communication technology (ICT) investment have been identified as sources of relative innovation underperformance in Europe vis-à-vis the USA. In this article, we investigate the R&D and ICT investment at the firm level in an effort to assess their relative importance and to what extent they are complements or substitutes. We use data on a large unbalanced panel data sample of Italian manufacturing firms constructed from four consecutive waves of a survey of manufacturing firms, to estimate a version of the CDM model of R&D, innovation, and productivity [Crépon–Duguet–Mairesse 1998. Research, innovation and productivity: An econometric analysis at the firm level. Economics of Innovation and New Technology 7, no. 2: 115–58] that has been modified to include ICT investment and R&D as the two main inputs into innovation and productivity. We find that R&D and ICT are both strongly associated with innovation and productivity, with R&D being more important for innovation, and ICT investment being more important for productivity. For the median firm, rates of return to both investments are so high that they suggest considerably underinvestment in both these activities. We explore the possible complementarity between R&D and ICT in innovation and production, but find none, although we do find complementarity between R&D and worker skill in innovation.     

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.     

The productivity effects of local R&D outsourcing: the moderating role of subsidiary mandate and internal R&D

This study examined the moderating effects of two kinds of internal R&D (parent R&D and subsidiary R&D) on the relationship between local R&D outsourcing and subsidiary productivity as internal R&D challenges the collaborative relationships in the local environment. Due to the specific feature of a subsidiary mandate, we further investigate whether two distinct kinds of internal R&D have different moderating effects between exploitation-oriented subsidiaries and exploration-oriented subsidiaries, based on a sample of longitudinal data set of 263 Taiwan-based manufacturing subsidiaries over the period 2006–2009. The empirical results show that for exploitation-oriented subsidiaries parent R&D plays a significant and negative moderating role on the impact of local R&D outsourcing based on local collaboration, while a positive moderating role is observed with parent R&D and subsidiary R&D for exploration-oriented subsidiaries.     

A matching analysis of why some firms in peripheral regions undertake R&D whereas others do not

Many studies have established the importance of investment in R&D to facilitate innovation and consequently improve firm productivity. Firms decide whether or not to undertake R&D depending on a range of factors such as market orientation, business objectives, competitive advantages and absorptive capacity. This paper studies the factors that influence this decision in peripheral locations; and for firms that do not undertake R&D, we analyse the reasons for not doing so. The research is based on data from a survey of some 250 matched firms operating in Northern Ireland, about half undertaking R&D and half not. Northern Ireland is an interesting case study because it exhibits a low level of investment in R&D despite the public subsidies and policy initiatives that have existed over the last 30 years. For firms that undertake R&D, our results mostly confirm the findings of others while for firms that do not undertake R&D the results point to a capabilities-gap rather than a resource-gap as the fundamental problem. Policy conclusions are drawn as to what might be done to boost both the amount of R&D undertaken and the number of firms engaged in R&D in peripheral regions.     

R&D and productivity: evidence from large UK establishments with substantial R&D activities

ABSTRACT

We use Office for National Statistics' micro data for large UK establishments in the production industries in the period 1997–2008 to study the relationship between their productivity and the presence of substantial R&D activities, either at the production unit itself, or at other UK reporting units owned by the same enterprise group. We estimate that total factor (revenue) productivity is on average about 14% higher at the establishments which have substantial R&D themselves, compared to those with no R&D. Among the establishments with no R&D themselves, we estimate that productivity is on average about 9% higher at those which belong to enterprise groups which do have substantial R&D elsewhere in the UK in the same sub-sector. For the establishments with substantial R&D themselves, we also estimate a significant positive relationship between current productivity and past R&D expenditure using dynamic specifications which allow for both establishment-specific ‘fixed effects’ and a serially correlated error component.     

International R&D Rivalry with Spillovers and Policy Cooperation in R&D Subsidies and Taxes

Abstract

We have investigated non-cooperative and jointly optimal R&D policies in the framework of Spencer & Brander (1983) in the presence of R&D spillovers. When R&D activities are strategic substitutes and the R&D game exhibits a positive externality, the result of Spencer & Brander (1983) reverses: the non-cooperative policy is a tax while the jointly optimal policy is a subsidy. Moreover, when R&D activities are strategic complements, the usual result of the prisoners' dilemma in the strategic subsidy game does not hold, implying that a welfare intervention is preferable over laissez-faire. When spillovers are sufficiently large, the joint welfare increases with subsidies being higher than those under non-cooperation.     

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.     

R&D,export and investment decision: evidence from European firms

This article provides an empirical investigation of the mechanism through which R&D influences export and tangible investment decisions. The analysis is based on a large representative and cross-country comparative sample of manufacturing firms across seven European countries. The novelty of this work lies in the three aspects. First, we expand the results on the R&D–export and R&D–investment relationships to a wide sample of cross-European firms. This differentiates from previous works based on single-country samples. Second, to the best of our knowledge, this study is the first in years which assess empirically the relationship between R&D and tangible investment at the micro level. Third, we control for endogeneity of R&D and simultaneity in firms’ decision whether to export and carry out tangible investment. The results of the analysis suggest that R&D positively affects export propensity and tangible investment. The results also reveal that neglecting endogeneity and simultaneity issues leads to underestimate the effect of R&D to both export and investment propensities.     

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.     

Matching public support for private product-innovating R&D: a theoretical analysis

This paper develops a theoretical model of product innovation where research and development (R&D) effort by a monopolist firm is endogenous and its outcome uncertain. The government attempts to aid such efforts with a matching grant. We consider different scenarios depending on whether two parties act simultaneously, act sequentially, or take part in a dynamic cooperative game with a trigger strategy. We also consider cases (i) when the products are exported, (ii) when the firm lobbies for R&D subsidy, and (iii) when the firm is foreign owned. We characterize situations when government intervention increases the chances of product innovation and when it does not.     

Does R&D spending boost tangible investment? An analysis on European firms

This article investigates the relationship between firm’s R&D intensity, expressed as R&D expenditure over sales, and investment intensity in tangible assets. It is commonly acknowledged that R&D requires additional physical investment to be implemented. R&D increases a firm’s productivity and return to tangible investments, thus, providing to the firm incentives to bear high tangible capital costs and to invest more. This represents a crucial issue for a firm’s growth, particularly considering the strong interaction between physical capital accumulation and technological progress. The analysis is based on a large sample of manufacturing firms across seven European countries in the period 2007–2009. Since the sub-sample of firms performing R&D might not be random, there may potentially be an endogeneity issue. The analysis also considers that firms may decide to spend on R&D and investment in physical capital simultaneously. The questions of both endogeneity and simultaneity are dealt with by employing an instrumental variable two-step procedure. We find a positive and significant impact of R&D intensity on firms’ tangible investment intensity. The econometric results highlight the importance of financial factors, particularly with respect to firms’ internal resources. Exposure to international trade has a negative impact on investment, possibly depending on the time-span of the sample used.

Abbreviations: Technological Innovation and R&D; Investment Capital; Industry Studies; Firm Behavior; Empirical Analysis     

Service-sector competition,innovation and R&D

The central prediction of the Aghion, Bloom, Blundell and Howitt model is an inverted U-shaped relationship between innovation and competition. The model is built on the assumption of a product market and has not yet been tested on the service sector. Using detailed firm-level data on Swedish service-sector firms, we find evidence of an inverse U-shaped relationship for exporting service-sector firms. A further breakdown of innovation expenditures shows that the inverse U-shaped pattern holds for intramural R&D and training, but not for extramural R&D. Finally, the results indicate that as competition increases, small firms tend to seek strategic alliances with competitors, whereas large firms tend to reduce collaboration with competitors. The behavior of large firms can partly be due to their superior capacity to handle innovation projects internally, which will become more important if increased competition results in higher pay-offs to innovation.     

Knowledge spillovers and R&D subsidies to new,emerging technologies

Is knowledge spillover a rationale for supporting R&D on new, emerging technologies more than R&D on other technologies? In this paper, I analyze whether innovation externalities caused only by knowledge spillovers differ between technologies of different maturity. I show that R&D should not be subsidized equally across industries when the knowledge stocks differ. This is because knowledge spillovers depend on the size of the knowledge stock and the elasticity of scale in R&D production. R&D in the emerging technology should be subsidized more when the elasticity is smaller than one. However, R&D in the mature technology should be subsidized more when the elasticity is larger than one.