Beyond Additionality: Are Innovation Subsidies Counterproductive?

27 Pages Posted: 12 Jun 2011

See all articles by Alessandra Catozzella

Alessandra Catozzella

University of Pavia

Marco Vivarelli

Universita Cattolica del Sacro Cuore, Milano; IZA Institute of Labor Economics


Building on a standard policy evaluation literature mainly aimed at estimating the additional effect of subsidies on either firms' innovative expenditures or innovative outputs only, this paper tries to move one step further, combining the two (input and output) dimensions of innovation into a unique efficiency perspective. To this aim, the impact of public funding on the ratio between innovative sales and innovative expenditures (innovative productivity) is estimated using a sample of firm-level data drawn from the third Italian Community Innovation Survey (CIS). A bivariate endogenous switching model has been developed in order to free the analysis of any ex ante sources of sample selection and firm heterogeneity, at the same time getting rid of the two sources of endogeneity potentially affecting the results, i.e. the possible simultaneity between subsidy allocation and the qualitative composition of the innovative output, as well as the endogeneity of public support with respect to innovative performance. Results show that innovative productivity is negatively affected by the innovation subsidy; far from 'doing better' as a result of government intervention, supported firms appear to exhaust their advantage through merely increasing their innovative expenditures.

Keywords: bivariate endogenous switching model, product innovation, policy evaluation, innovation subsidy

JEL Classification: O32, O38

Suggested Citation

Catozzella, Alessandra and Vivarelli, Marco, Beyond Additionality: Are Innovation Subsidies Counterproductive?. IZA Discussion Paper No. 5746. Available at SSRN:

Alessandra Catozzella (Contact Author)

University of Pavia

Corso Strada Nuova, 65
27100 Pavia, 27100

Marco Vivarelli

Universita Cattolica del Sacro Cuore, Milano ( email )

Largo Gemelli 1
Milano, 20123

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

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