Estimating the Local Average Treatment Effect of R&D Subsidies in a Pan-European Program

Abstract

We investigate the effect of Europe’s largest multilateral subsidy program for R&D-performing, small and medium-sized enterprises on firm growth. The program was organized under a specific budget allocation rule, referred to as Virtual Common Pot (VCP), which is designed to avoid cross-subsidization between participating countries. This rule creates exogenous variation in treatment status and allows us to identify the local average treatment effect of public R&D grants. In addition, we compare the program’s effect under the VCP rule with the standard situation of a Real Common Pot (RCP), where program authorities allocate a single budget according to uniform project evaluation criteria. Our estimates suggest no average effect of grants on firm growth but treatment effects are heterogeneous and increase with project quality. A Real Common Pot would have reduced the cost of policy induced job creation by 27%. We discuss the implications of our findings for the coordination of national policy programs within the European Research Area.

Keywords: Joint Programming Iniatives, R&D Policy, Virtual Common Pot, Instrumental Variable Estimation, European Research Area

JEL Classification: O38, H25, C31