Public grants to finance the research and development (R&D) efforts of private firms are an effective policy instrument. That is the conclusion of new research by Pietro Santoleri, Andrea Mina, Alberto Di Minin and Irene Martelli, to be presented at the annual congress of the European Economic Association in August 2020.
The study documents that public R&D grants awarded by the SME Instrument programme of the European Union lead firms to invest more, produce more patents, experience faster growth, increase their probability of receiving private equity financing while reducing their chances of failure. These effects are generally stronger for more financially constrained firms and are particularly beneficial for firms in less advanced countries and regions.
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Governments around the world use different policy measures to stimulate private investment in innovation, which amount to $100 billion spent every in OECD countries alone. Government intervention in this arena is justified by the presence of market failures that lead to insufficient investment in innovative activities by private firms, especially if young and small.
The most direct policy to support innovation is represented by public grants assigned to private firms to conduct R&D. Do R&D grants work? Do they generate inventions and commercial success that would not have occurred if the private sector were solely responsible for R&D activities?
The new study addresses these questions by focusing on the SME Instrument. Managed by the Executive Agency for Small and Medium Enterprises (EASME), this is the first European R&D grant programme aimed at financing young and small enterprises with projects of high innovation potential.
The research is based on data on successful and unsuccessful applications from all SME Instrument competitions from 2014 to 2017. The authors leverage the fact that the projects received by EASME for each competition are ranked by independent experts, and that the winners are exclusively selected based on the budget availability of EASME.
They take advantage of this mechanism for assigning grants and adopt a ‘regression discontinuity design’ approach to evaluate the impact of R&D grants over several aspects of the innovation-to-market process.
The findings indicate that R&D grants have positive and sizable effects on a wide range of firm-level outcomes:
- 15-31% increase in the amount of patents generated.
- Increase in firm growth in both assets (46-96%) and employment (20-45%).
- Over 100% increase in the probability of receiving follow-on private equity.
- Around 100% decrease in failure chances.
Taken together, the results suggest that the policy leads to more innovation and better firm performance, which would not have been achieved without public direct R&D support. IT does not trigger ‘crowding-out’ effects, but rather induces superior performances and lays the foundations for future growth through follow-on private investment. The study also reports that R&D grants tend to alleviate financial frictions and are particularly beneficial for firms in less advanced countries and regions.
Overall the study indicates that pan-European efforts to support private R&D are an effective policy. This is important given the historical difficulty for young and small EU firms in raising capital to carry out and bring to market their innovation projects.
Increasing the SME Instrument budget would also be an important target in view of the Covid-19 crisis. In times where bank and equity finance might be difficult to secure for innovative firms, R&D grants can represent a useful policy tool to sustain long-term growth opportunities.
ENDS
Download the working paper, The causal effects of R&D grants: evidence from a regression discontinuity, here
The article was also featured in VoxEU.org and LaVoce.info
Contact:
Pietro Santoleri
Institute of Economics
Sant’Anna School of Advanced Studies
E-mail: Pietro.santoleri@santannapisa.it
Website: www.pietrosantoleri.com
Twitter: @santpietro
Tel.: +39 340 54 29 226
Andrea Mina
Institute of Economics
Sant’Anna School of Advanced Studies
E-mail: andrea.mina@santannapisa.it