Are Complementary Policies Substitutes? Evidence from R&D Subsidies in the UK

Abstract

This paper studies whether grants and tax incentives for private R&D are complements or substitutes. I use multiple quasi-experimental research designs to examine firms in the United Kingdom and find that increasing tax credit generosity substantially enhances the effect of grant funding on R&D for small firms, suggesting that the instruments are complements. Financial constraints are likely at play. The effects are strongest for firms that appear constrained, and the combination of policies increases R&D "entry." Furthermore, I find that the instruments are substitutes for larger firms, which are usually less constrained. Some alternative explanations can be ruled out.

Keywords: R&D, innovation, policy interactions, difference-in-discontinuities

JEL Classification: D22, H0, H25, L53, O31, O32, O38