Do R&D Subsidies Cause Better Access to External Financing? Empirical Evidence from the Research Council of Norway’s Grant Programs

Abstract

Public funding of R&D has become a popular policy instrument to alleviate financial constraints for innovation and entrepreneurship. This master’s thesis analyses whether public R&D subsidies lead to better access to external financing. Using data on grant applications to the Research Council of Norway in the period between 2010 to 2020, we find grants to have a strong, positive impact on the growth in capital for financially constrained firms. We address endogeneity concerns by using a regression discontinuity design. In particular, we exploit ranks in application grades for as-if-random assignments around a threshold for grant approval. Receiving a grant more than doubles young and small ventures’ probability of raising equity the first year after application, from 20 percent to 52.8 percent, while the likelihood of raising long-term debt in the same period increases from 18.1 percent to 33.4 percent. Testing for heterogeneous treatment effects, we also find grants to increase the probability of subsequent long-term debt financing for knowledge-intensive firms. Keywords: Research and Development, R&D Subsidies, Innovation, Public Policy Instruments, Financial Constraints, Regression Discontinuity Design