Barriers to innovation and subsidy effectiveness

This paper explores the effects of commercial subsidies to R&D by means of a model of firms’ decisions about performing R&D when some government support can be expected. The model is estimated with an unbalanced panel sample of more than 2,000 performing and non-performing Spanish manufacturing firms. For the non-performing firms, we compute the trigger subsidies required to induce R&D spending. Among the performing firms, we detect those that would cease to perform R&D if subsidies were eliminated. We also explore the change in the privately financed R&D effort of the performing firms. Results suggest that subsidies stimulate R&D activities, and even show that some firms would stop performing these activities in their absence, but also reveal that most actual subsidies go to firms that would have performed R&D otherwise. In these firms, however, subsidies are found to increase R&D spending with no crowding out of private funds.