An Empirical Analysis of Factors Explaining the Level of R&D Subsidies and their Productivity Effects Evidence from Firm-Level Panel Data

The Industrial Research Promotion Fund (Forschungsförderungsfond, FFF) is Austria’s most important source of finance funding R&D projects carried out by business enterprises. However, the decision on the level of R&D subsidies will be affected by both the funding agency's objectives and firm characteristics. This paper analyzes the factor explaining the intensity of R&D subsidies as well as their productivity effects. The analysis is based on unique panel data for about 1,000 Austrian firms receiving R&D subsidies for the period 1996-2002. The results of the panel data analysis suggest that the ratio of R&D subsidies to total R&D expenditures is significantly negatively related to both firm size and the current R&D intensity, but not to the cash-flow ratio in the past. Furthermore, we find that newly founded enterprises as well as firms in the electrical machinery and software industry have a significantly higher ratio of R&D subsidies to total R&D. In contrast, fast output growth in the past is associated with a lower R&D subsidy ratio. Overall, the results are consistent with the fund's strategy. Using a Cobb-Douglas function to assess the productivity effects of both privately and publicly funded R&D, we find that the initial R&D subsidy-sales ratio has a significant but small effect on the change in output per worker in the following two years. Overall, two percent of the annual change in output per worker of about 5.8 percent during the period can be attributed to the initial R&D subsidy sales ratio.