Title: R&D investment responses to R&D subsidies: a theoretical analysis and a microeconometric study

Authors: Tor Jakob Klette; Jarle Møen

Addresses: Department of Economics, University of Oslo, Norway. ' Department of Finance and Management Science, Norwegian School of Economics, Hellevn. 30, N-5045 Bergen, Norway

Abstract: Subsidies to the Norwegian high-tech industries have traditionally been given as 'matching grants', i.e., the subsidies are targeted, and the firms have to contribute a 50% own risk capital to the subsidised projects. Our results suggest that grants do not crowd out privately financed R&D, but that subsidised firms do not increase their privately financed R&D either. Hence, the own risk capital seems to be taken from ordinary R&D budgets. We also investigate possible long-run effects of R&D subsidies, and show that conventional R&D investment models predict negative dynamic effects of subsidies. Our data, however, do not support this claim. On the contrary, there are indications of a positive dynamic effect, i.e., temporary R&D subsidies seem to stimulate firms to increase their R&D investments even after the grants have expired. We propose learning-by-doing in R&D activities as a possible explanation for this, and present a theoretical analysis showing that such effects may alter the predictions of the conventional models. A structural, econometric model of R&D investments incorporating such learning effects is estimated with reasonable results.

Keywords: technology policy; R&D subsidies; matching grants; short run additionality; long run additionality; Norway; IT industry; information technology; research and development; high-tech industries; high technology; R&D investment; privately financed R&D; risk capital; learning-by-doing; econometric modelling; learning effects.

DOI: 10.1504/WRSTSD.2012.047687

World Review of Science, Technology and Sustainable Development, 2012 Vol.9 No.2/3/4, pp.169 - 203

Published online: 18 Sep 2014 *

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