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

58 Pages Posted: 31 May 2019

Date Written: March 1, 2019

Abstract

Governments subsidies R&D through a mix of interdependent mechanisms, but subsidy interactions are not well understood. This paper provides the first quasi-experimental evaluation of how R&D subsidy interactions impact firm behavior. I use funding rules and policy changes in the UK to show that direct grants and tax credits for R&D are complements for small firms but substitutes for larger firms. An increase in tax credit rates substantially enhances the effect of grants on R&D expenditures for small firms. For larger firms, it cuts the positive effect of grants in half. I explore the mechanisms behind these findings and provide suggestive evidence that complementarity is consistent with easing financial constraints for small firms. Substitution by larger firms is most consistent with the subsidization of infra-marginal R&D expenditures. I rule out some alternative explanations. Subsidy interactions also impact the types of innovation efforts that emerge: with increases in both subsidies, small firms steer efforts increasingly towards developing new goods (i.e., horizontal innovations) as opposed to improving existing goods (i.e., vertical innovations). Accounting for subsidy interactions could substantially improve the effectiveness of public spending on R&D.

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

JEL Classification: D22, G28, H0, H2, L53, O31, O32, O38

Suggested Citation

Pless, Jacquelyn, Are 'Complementary Policies' Substitutes? Evidence from R&D Subsidies in the UK (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3379256 or http://dx.doi.org/10.2139/ssrn.3379256

Jacquelyn Pless (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, OX1 4AU
United Kingdom

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