Research Discussion Papers, Bank of Finland
No 10/2007:
When do R&D subsidies boost innovation? Revisiting the inverted U-shape
Juha Kilponen ()
and Torsten Santavirta ()
Abstract: We show theoretically that a proportional R&D subsidy
accelerates innovation activity at all degrees of competition in the modern
Schumpeterian growth model, but less so at high degrees of competition. We
then use company-level data on patenting activity, product market
competition and R&D subsidies of Finnish firms during 1990–2001 to test the
theoretical prediction. The empirical findings can be summarized as
follows. Firstly, we find relatively strong evidence in favour of the
inverted U-shape between competition and innovation. Secondly, we find some
evidence that a direct R&D subsidy increases innovative activity at all but
very high degrees of competition. This can be interpreted so mean that the
R&D subsidy reinforces the Schumpeterian effect due to the negative
cross-effect of R&D subsidy and competition. This is evident from the
finding that an increase in the R&D subsidy steepens the inverted U
relationship when competition is fierce.
Keywords: competition; innovation; R&D subsidies; patents; (follow links to similar papers)
JEL-Codes: D40; H25; L10; O31; (follow links to similar papers)
30 pages, September 12, 2007
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