When do R&D subsidies boost innovation? Revisiting the inverted U-shape
AbstractWe show theoretically that a proportional R&D subsidy accelerates innovation activity at all degrees of competition in the modern Schumpeterian growth model, but less so at high degrees of competition. We then use company-level data on patenting activity, product market competition and R&D subsidies of Finnish firms during 1990–2001 to test the theoretical prediction. The empirical findings can be summarized as follows. Firstly, we find relatively strong evidence in favour of the inverted U-shape between competition and innovation. Secondly, we find some evidence that a direct R&D subsidy increases innovative activity at all but very high degrees of competition. This can be interpreted so mean that the R&D subsidy reinforces the Schumpeterian effect due to the negative cross-effect of R&D subsidy and competition. This is evident from the finding that an increase in the R&D subsidy steepens the inverted U relationship when competition is fierce.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 10/2007.
Length: 30 pages
Date of creation: 12 Sep 2007
Date of revision:
competition; innovation; R&D subsidies; patents;
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-16 (All new papers)
- NEP-COM-2007-09-16 (Industrial Competition)
- NEP-INO-2007-09-16 (Innovation)
- NEP-IPR-2007-09-16 (Intellectual Property Rights)
- NEP-MIC-2007-09-16 (Microeconomics)
- NEP-TID-2007-09-16 (Technology & Industrial Dynamics)
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- Correa, Paulo & Andres, Luis & Borja-Vega, Christian, 2013. "The impact of government support on firm R&D investments : a meta-analysis," Policy Research Working Paper Series 6532, The World Bank.
- Gustavsson Tingvall, Patrik & Karpaty, Patrik, 2008.
"Service-sector competition, innovation and R&D,"
Working Paper Series in Economics and Finance
702, Stockholm School of Economics.
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