Estimating the additionality of R&D subsidies using proposal evaluation data to control for research intentions

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 short‐run additionality of R&D subsidies is 1.15, i.e., a one‐unit 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.