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R&D Investment Responses to R&D Subsidies: A Theoretical Analysis and a Microeconometric Study

42 Pages Posted: 7 Oct 2011  

Tor Jakob Klette

(Deceased)

Jarle Møen

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: September 6, 2011

Abstract

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.

Keywords: Technology policy, R&D subsidies, matching grants, short run additionality, long run additionality, Norwegian IT-industry

JEL Classification: H25, H32, L53, O32, O38

Suggested Citation

Klette, Tor Jakob and Møen, Jarle, R&D Investment Responses to R&D Subsidies: A Theoretical Analysis and a Microeconometric Study (September 6, 2011). NHH Dept. of Finance & Management Science Discussion Paper No. 2011/15. Available at SSRN: https://ssrn.com/abstract=1940407 or http://dx.doi.org/10.2139/ssrn.1940407

Tor Jakob Klette

(Deceased)

N/A

Jarle Moen (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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