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Field: Sveriges innovationsförmåga

The long-term effects of R&D subsidies on firm performance:
Evidence from a regression discontinuity design

Innovation is the most important factor for economic growth, but the government’s ability to affect innovation outcome is contested. This study contributes to the understanding of the long-term effects of one of the most frequently used innovation policy tools, R&D subsidies, for Swedish innovation policy as well as the international research and policy community.

Innovation is the most important factor for long-term economic growth in advanced economies, but the empirical results regarding the effects of the most common innovation policy, namely research and development (R&D) grants, are inconclusive. This paper presents quasi-experimental evidence on the effectiveness of R&D subsidies for small businesses. We use firm level data on Swedish applicants of the EU-financed Eurostars R&D program during the period 2008 to 2019.

The program finances international collaborative R&D projects led by small- and medium-sized firms. Subsidies are awarded based on applicants’ score points where applicants with scores above a certain threshold receive funding. Through the use of a list in ranking order it is possible to estimate the causal effect on, e.g., the employment and turnover of the subsidies using a sharp regression discontinuity design. Access to panel data on firms’ financial information gives us a unique opportunity to evaluate the impact of the program up to 12 years after the granting of subsidies.

The empirical analysis shows that these subsidies have a positive and significant effect on turnover, employment, the number of scientific and technology workers, and the propensity to export. The effect is stronger on firms that are expected to be financially constrained, such as small and younger firms. We find that the subsidy effect on turnover, employment and export last for more than 7 years after the end of the project, which is consistent with explanations based on long-term channels such as improved competitiveness through the market introduction of innovations. We show that the main result is robust to alternative model specifications.

The long-term effects of R&D subsidies on firm performance: Evidence from a regression discontinuity design

Serial number: WP 2022:02

Reference number: 2021/50

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