Public subsidies for R&D and public sector pharmaceutical innovation

This paper investigates the relationship between public subsidies for research and development (R&D) and public sector drug development. For the analyses, a novel dataset based on the European clinical trial registry was created, and panel data between 2007 and 2015 originating from twenty-four countries in the European Union were incorporated. For the econometric analysis, I exploit an exogenous shock coming from the Lisbon strategy on innovation policy in Europe to deal with potential endogeneity issues. Two-stage least squares (2SLS) estimates suggest that an increase in public subsidies causes an increase in Phase I clinical trials for non-orphan drugs and also stimulates basic research and Phases I and II of orphan medicinal product clinical trials. These effects are robust, when different time lags and measures of innovation apply, and they are also robust to heteroscedasticity-based instrument estimations. Overall, the results imply that government funding is an important determinant of the pharmaceutical innovation process across different stages and products. Moreover, foreign sources of government funding have a negative impact on the European clinical trials across the examined phases and innovations, while at the same time, the importance of the potential market-size is low.