The Implications Of State Aid To R&D On Economic Development In The European Union

In economic terms, the importance of state aid policy refers to the maintaining of an undistorted competition and the correction of inherent â€Å"market failures†which may occur in the economy, aiming at increasing economic efficiency, based on the traditional assumption that an effective competition will have a positive impact on economic development. The main objective of the present paper is to establish a possible correlation between state aid to research and development (R&D) and GDP level in the EU. Our research hypothesis relates to considering state aid as a significant contribution to the economic development, measured by GDP level, which will be estimated as a function of state aid. Consequently, the main variables of this study are state aid to R&D and GDP level, considered in both relative and absolute terms. The relationship between technological change and economic development has been at the centre of the interest in both theoretical and empirical literature. The role of institutions and government policies in stimulating technological change has been provided mainly by the evolutionary theory, which considers economic development as a technological change driven process featured by a complex pattern which includes both uniformity and idiosyncrasy across time and countries. The relationship between these variables was estimated through a panel model which used seemly unrelated regression (SUR) and ordinary least squares estimation (OLS). Taking into account that the economic value is likely to be realized after the innovation process took place we have interpreted this economic aspect in an econometric sense by using time lags. In analysing the relative importance of state aid to R&D, we have proposed an index which evaluates the relation between state aid and the relative size of the Member Stateâ€â"¢s economy. The relationship between state aid and GDP level was found to be positive and statistically significant, suggesting that state aid is positively correlated with economic development and showing that state aid programs tend to have an incentive effect for the economic activity after they have been granted, due to the spillover effect of R&D activities assumed by the government funding incorporated in the state aid projects. On the other hand, the analysis of state aid relative to GDP has demonstrated that significant levels of volatility indicate a persistence of disparities between Member States in the period considered (2004-2009), suggesting that national particularities remain an important determinant of government support through state aid, which implies the necessity of a better coordination in the economic policies targeting innovation in the Member States.