The Returns to Public Investment in Innovation: Do R&D Grants Influence Corporate Innovation, Performance, and Employment?

Abstract

We examine the effectiveness of government direct funding of firm innovation through R&D grants on firms future R&D investment, employment, and performance. Using a novel proprietary dataset of 1,825 R&D grants awarded to Irish domiciled firms for the period 2003-2012, we first show that grant ‘winners’ differ significantly from other firms in terms of several firm-level and industry characteristics, confirming that government sponsored grant awarding agencies ‘select’ winners using pre-determined characteristics. We find that grant winners experience a 19.8% higher R&D growth rate than ‘similar’ non-grant winners in the year after winning. The return per Euro invested is about 12 Euro relative to the average non-grant winning firm, but declines to 1.64 when benchmarked against ‘similar’ non-grant winners, suggesting grants help stimulate additional private investment. Grant winners who are not R&D active prior to winning also experience significantly greater increases in total and in-house R&D employment. Further, we report some evidence of improvements in firm ex-post financial performance, but this is conditional on grant winners investing in R&D. We use a propensity-scoring matching (PSM) system and ‘placebo’ tests to help alleviate sample selection and causality concerns.

Keywords: R&D, innovation, grants, export intensity, employment growth

JEL Classification: G31, G38, Q31, Q32