Scandinavian Working Papers in Economics

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

No 2014/18: Estimating the additionality of R&D subsidies using proposal evaluation data to control for research intentions

Morten S. Henningsen (), Torbjørn Hægeland () and Jarle Møen ()
Additional contact information
Morten S. Henningsen: Finance Norway, Postal: Finance Norway, Postboks 2473 Solli, 0202 Oslo, Norway
Torbjørn Hægeland: Statistics Norway, Postal: Statistics Norway, Research Department, P.O. Box 8131 Dep, 0033 Oslo, Norway
Jarle Møen: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: Empirical examination of whether R&D subsidies crowd out private investments has been hampered by selection problems. A particular worry is that project quality and research intentions may be correlated with the likelihood of receiving subsidies. Using proposal evaluation data to control for research intentions, we do not find strong evidence suggesting that this type of selection creates a severe bias. Proposal evaluation grades strongly predict R&D investments and reduce selection bias in cross-sectional regressions, but there is limited variation in grades within firms over time. Hence, in our sample, unobserved project quality is largely absorbed by firm fixed effects. Our best estimate of the shortrun additionality of R&D subsidies is 1.15, i.e., a oneunit increase in subsidy increases total R&D expenditure in the recipient firm by somewhat more than a unit. We demonstrate, however, that there is measurement error in the subsidy variable. Additionality is therefore likely to be underestimated.

Keywords: Technology policy; R&D subsidies; input additionality; selection; proxy variables

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

26 pages, April 30, 2014

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