When Do R&D Subsidies Boost Innovation? Revisiting the Inverted U-Shape

33 Pages Posted: 13 Sep 2007

See all articles by Juha Kilponen

Juha Kilponen

Bank of Finland - Research

Torsten Santavirta

Aalto University

Date Written: 2007


We show theoretically that a proportional R&D subsidy accelerates innovation activity at all degrees of competition in the modern Schumpeterian growth model, but less so at high degrees of competition. We then use company-level data on patenting activity, product market competition and R&D subsidies of Finnish firms during 1990-2001 to test the theoretical prediction. The empirical findings can be summarized as follows. Firstly, we find relatively strong evidence in favour of the inverted U-shape between competition and innovation. Secondly, we find some evidence that a direct R&D subsidy increases innovative activity at all but very high degrees of competition. This can be interpreted so mean that the R&D subsidy reinforces the Schumpeterian effect due to the negative cross-effect of R&D subsidy and competition. This is evident from the finding that an increase in the R&D subsidy steepens the inverted U relationship when competition is fierce.

Keywords: competition, innovation, R&D subsidies, patents

JEL Classification: D40, L10, O31, H25

Suggested Citation

Kilponen, Juha and Santavirta, Torsten, When Do R&D Subsidies Boost Innovation? Revisiting the Inverted U-Shape (2007). Bank of Finland Research Discussion Paper No. 10/2007. Available at SSRN: https://ssrn.com/abstract=1014019 or http://dx.doi.org/10.2139/ssrn.1014019

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Torsten Santavirta

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101

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