R&D Subsidies and Firm-Level Productivity: Evidence from France

This paper investigates a theoretical and empirical model to provide a new insight into the relationship between R&D subsidies and firmlevel productivity. The empirical analysis evaluates the productivity of firms involved in a European programme of public R&D subsidies called Eureka. The findings suggest that the Eureka firms experience on average productivity gains towards the end of the four-year subsidy period. However, the average increase in productivity hides substantial firm heterogeneity. Namely, lowly productive firms gain more from the Eureka R&D subsidies than highly productive firms. The empirical analysis is conducted across industries by using propensity score matching and a difference-in-differences estimation method. The theoretical model explores the linkage between an R&D subsidy and the speed at which a subsidized firm adopts a new technology. It is shown that such a firm adopts the new technology faster. This is due to R&D subsidy decreases the fixed cost of adopting the new technology. But it is also due to R&D spillovers which decrease the marginal cost of production. Furthermore, the lowly productive firm characterized by a high marginal cost adopts the new technology faster than a highly productive firm.