Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2011/15: R&D investment responses to R&D subsidies: A theoretical analysis and a microeconometric study

Tor Jakob Klette and Jarle Møen ()
Additional contact information
Tor Jakob Klette: Department of Economics, University of Oslo, Postal: University of Oslo, Department of Economics, P.O box 1095, Blindern, 0317 OSLO, Norway
Jarle Møen: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 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 subsidized projects. Our results suggest that grants do not crowd out privately financed R&D, but that subsidized 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 effects, 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; Norwegian IT-industry

JEL-codes: H25; H32; L53; O32; O38

41 pages, September 6, 2011

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