UK and EU Subsidies and Private R&D Investment: Is There Input Additionality?

Abstract

This paper investigates the effects of UK and EU subsidies on privately-funded R&D intensity of a sample of 39,730 UK firms. The sample consists of R&D-active firms surveyed in at least one year from 1998-2012. The results are obtained from 4 different estimators, with different degrees of control for selection and time-constant fixed effects: (i) pooled OLS without selection correction; (ii) fixed-effect (within-group) estimation without selection correction; (iii) pooled OLS with selection correction; and (iv) fixed-effect estimation with selection correction. We report that UK subsidies are not associated with additionality in privately -funded R&D intensity in the full sample, and the additionality effect in manufacturing is too small to be conomically significant. In contrast, EU subsidy is associated with an additionality effect of 2% in both samples. Ordered-Heckman estimations of leverage indicate that an increase in UK subsidy intensity (subsidy/total R&D) is not likely to make a difference to private R&D effort in any of the subsidy intensity classes demarcated by 4 quartiles of the intensity distribution. However, an increase in EU subsidy intensity is associated with leverage in subsidy intensity class 3, which corresponds to subsidy intensity values within the 3rd quartile of the distribution.

Keywords: Innovation, R&D, subsidies, additionality

JEL Classification: C41, D21, D22, L1, 03