R&D Investment Responses to R&D Subsidies: A Theoretical Analysis and a Microeconometric Study
Tor Jakob Klette
Norwegian School of Economics (NHH) - Department of Business and Management Science
September 6, 2011
NHH Dept. of Finance & Management Science Discussion Paper No. 2011/15
Subsidies to the Norwegian high-tech industries have traditionally been given as "matching grants", i.e. the subsidies are targeted, and the firms have to contribute a 50 % own risk capital to the subsidized projects. Our results suggest that grants do not crowd out privately financed R&D, but that subsidized firms do not increase their privately financed R&D either. Hence, the own risk capital seems to be taken from ordinary R&D budgets. We also investigate possible long-run effects of R&D subsidies, and show that conventional R&D investment models predict negative dynamic effects of subsidies. Our data, however, do not support this claim. On the contrary, there are indications of a positive dynamic effects, i.e. temporary R&D subsidies seem to stimulate firms to increase their R&D investments even after the grants have expired. We propose learning-by-doing in R&D activities as a possible explanation for this, and present a theoretical analysis showing that such effects may alter the predictions of the conventional models. A structural, econometric model of R&D investments incorporating such learning effects is estimated with reasonable results.
Number of Pages in PDF File: 42
Keywords: Technology policy, R&D subsidies, matching grants, short run additionality, long run additionality, Norwegian IT-industry
JEL Classification: H25, H32, L53, O32, O38
Date posted: October 7, 2011
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