Recent Research: Global Perspectives on Effectiveness of R&D Subsidies

Policymakers and researchers in the U.S. continue to debate the effectiveness and value of providing R&D subsidies to firms in the hope of spurring technological developments and wealth generation. At the national level, several organizations have called to make the federal R&D tax credit, also known as the Research and Experimentation Tax Credit (RETC), a permanent incentive program. Researchers centered in countries outside of the U.S. are looking at the effectiveness of R&D subsidies in their nations, as well.

 

Three recent papers, which separately review Canadian, Catalonian (a region of Spain), and Norwegian efforts to support industrial R&D, find subsidies do influence company performance, mostly positively. In the Norwegian paper, however, not all impacts at the firm level are the desired ones. All three papers are highlighted below.

 

Charles Bérubé and Pierre Mohnen explore data from manufacturing firms responding to the 2005 Canadian Innovation Survey in order to distinguish if firms that received R&D grants and R&D tax credits produced more innovative outputs than firms that received only R&D tax credits. In Are Firms That Received R&D Subsidies More Innovative?, the authors chose three outputs – the creation of a world-first innovation, the number of new or significantly improved products, and the percentage of revenue from their innovative products – to show that in all three cases, firms that utilized both types of incentives were significantly more productive. For example, 25 percent of firms using both tax credits and grants mentioned they had produced a product that new the global marketplace within the last three years, compared to 17 percent of firms that used tax credits alone. To compare the two sets of firms, the authors incorporated an algorithm into their dataset that extracted sets of companies resembling each other in such characteristics as provincial location and manufacturing sector orientation. Using this method to control for firm differences, they concluded that a mix of both tax incentives and grants to stimulate innovation are more effective than using tax credits alone.

 

The authors Nestor Brown, Daniel Estivill, and Mauro Mediavilla utilize a similar technique of firm matching methodology in their research on Catalonian firms, but they observe the effects of subsidies at a regional, rather than a national, level. Evaluating the Impact of Public Subsidies on a Firm’s Performance: a Quasi-experimental Approach investigated the effect of subsidies from a regional agency located in the Catalonia region, whose industries represent 25 percent of Spain’s total industrial base. After controlling for differences between the characteristics of firm, the authors found that subsidies had an impact on the amount of a firm’s value-added growth rate within a two-year period after being awarded. They ran various models that altered the sample population, and among the models, the value-added growth rate for firms that received subsidies were on average between 3.5 and 5.6 percent higher than firms that did not receive the subsidy. It should be noted that the study did not elaborate on the kind of subsidy provided by the region, and many of the 421 firms that received funding were in the manufacturing or “high technology” fields.

 

In Do Subsidies Have Positive Impacts Upon R&D and Innovation Activities at the Firm Level?, Tommy Hoyvarde Clausen investigates the impacts of governmental R&D subsidies on firms in Norway, separating a handful of funding programs from the European Union and the Norwegian government into two categories, either “close to the market” or “far from the market” subsidies. Clausen’s approach considers not only how these two types of subsidies effect, stimulate or substitute various expenditures of firms, but also the quality of R&D done at the firm level. As a proxy for R&D quality, Clausen uses data on the number of hours worked by people with advanced degrees within a firm.

 

His conclusions include that “far from the market” subsidies increase a firm’s expenditures on research activities and improve the quality of R&D done at the firm level. Alternatively, the “close to the market” subsidies decrease the funds devoted to development. Thus, “far from the market” subsidies stimulate R&D spending, and “close to the market” subsidies are a substitute for R&D spending.

 

Using this reasoning, the amount, quality and type of R&D performed by firms in the private sector can be enhanced by providing funds to projects that are far from the commercialization stage. Additionally, the effectiveness of R&D subsidies may be dependent on the type of research the subsidies are targeting. This work boosts the notion that governments should spend funds on basic and novel research, which are far from the point of commercialization.

 

Bérubé and Mohnen’s paper (Canada) can be read at:

http://www.merit.unu.edu/publications/wppdf/2007/wp2007-015.pdf

 

Brown, Estivill, and Mediavilla’s paper (Catalonia) is available at:

http://www.pcb.ub.es/ieb/aplicacio/fitxers/2007/4/Doc2007-3.pdf

 

Clausen’s paper (Norway) can be found at: http://www.tik.uio.no/InnoWP/Tommy%20IPP15%20WPready.pdf