Working Paper Series
The Efficiency of Innovation Subsidies
Abstract: State subsidies to R & D or innovative investments in
firms are organized in many different ways. Examples from the plethora of
extant subsidy instruments are tax incentives, grants to researchers,
project grants, loans, conditional loans, and grants with royalty rights.
Very little is currently known about the effectiveness of these subsidy
In this paper we compare the effectiveness of eight forms of
subsidy for R & D projects. The comparison is based on a survey of Swedish
R & D managers, including detailed information about 214 research projects
or project proposals. In a first set of results we report managers' general
judgments about the effectiveness of different subsidy forms. Second, R & D
managers were asked to judge how each subsidy instrument would affect the
firm's decision about the size of each project and whether to conduct it.
This allows an estimate of how such additional R & D each policy might
There are two main conclusions. First, general subsidies do not
seem to induce much additional R & D for a given amount of subsidy. Second,
among specific subsidies so called "stock option grants" seem to induce
most R & D per subsidy krona. These are grants that give the state a right
to recoup some of its funding by exercising a stock option if the firm's
value rises rapidly. The main reason that the stock option grant performs
well is not that the state can recoup some of its costs but rather that
firms do not accept this subsidy for much of the research that they would
have conducted even without subsidy.
Keywords: R&D subsidies; optimal subsidy form; expectations; innovation; (follow links to similar papers)
JEL-Codes: H71; O32; (follow links to similar papers)
25 pages, September 1989
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