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Market failures and the additionality effects of public support to private R&D: Theory and empirical implications

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  • Takalo, Tuomas

    ()
    (Bank of Finland and KU Leuven)

  • Tanayama , Tanja

    ()
    (National Audit Office of Finland)

  • Toivanen , Otto

    ()
    (KU Leuven & CEPR)

Abstract

We extend the theoretical basis of the empirical literature on the effects of R&D subsidies by providing an estimable model of strategic interaction among subsidy applicants, and public and private sector R&D financiers. Our model incorporates fixed R&D costs and a cost of external finance. We derive the optimal support rule. At the intensive (extensive) margin the costs of external funding reduce (increase) the optimal subsidy rate. We also establish necessary and sufficient conditions for the existence of additionality. It turns out that additionality at the intensive margin is less likely with large spillovers. Our results suggest that the relationship between additionality and welfare may not be straightforward.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 2/2013.

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Length: 40 pages
Date of creation: 13 Feb 2013
Date of revision:
Publication status: Published as Takalo, Tuomas, Tanja Tanayama and Otto Toivanen, 'Market failures and the additionality effects of public support to private R&D: Theory and empirical implications' in International Journal of Industrial Organization, 2013, pages 634-642.
Handle: RePEc:hhs:bofrdp:2013_002

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: R&D; entrepreneurial finance; R&D subsidies; innovation policy;

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  1. Busom, Isabel & Corchuelo, Beatriz & Martinez Ros, Ester, 2012. "Tax incentives or subsidies for R&D?," MERIT Working Papers 056, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  2. Saul Lach, 2000. "Do R&D Subsidies Stimulate or Displace Private R&D? Evidence from Israel," NBER Working Papers 7943, National Bureau of Economic Research, Inc.
  3. Bloom, Nick & Griffith, Rachel & Van Reenen, John, 2002. "Do R&D tax credits work? Evidence from a panel of countries 1979-1997," Journal of Public Economics, Elsevier, vol. 85(1), pages 1-31, July.
  4. Almus, Matthias & Czarnitzki, Dirk, 2001. "The effects of public R&D subsidies on firms' innovation activities: the case of Eastern Germany," ZEW Discussion Papers 01-10, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Takalo , Tuomas, 2013. "Rationales and instruments for public innovation policies," Research Discussion Papers 1/2013, Bank of Finland.
  6. David, Paul A. & Hall, Bronwyn H. & Toole, Andrew A., 2000. "Is public R&D a complement or substitute for private R&D? A review of the econometric evidence," Research Policy, Elsevier, vol. 29(4-5), pages 497-529, April.
  7. Xulia Gonz�lez & Jordi Jaumandreu & Consuelo Pazo, 2005. "Barriers to Innovation and Subsidy Effectiveness," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 930-949, Winter.
  8. Tuomas Takalo & Tanja Tanayama & Otto Toivanen, 2013. "Estimating the Benefits of Targeted R&D Subsidies," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 255-272, March.
  9. Jacek Warda, 2006. "Tax Treatment of Business Investments in Intellectual Assets: An International Comparison," OECD Science, Technology and Industry Working Papers 2006/4, OECD Publishing.
  10. Scott J. Wallsten, 2000. "The Effects of Government-Industry R&D Programs on Private R&D: The Case of the Small Business Innovation Research Program," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 82-100, Spring.
  11. Petr Hanel & Dirk Czarnitzki & Julio Miguel Rosa, 2005. "Evaluating the Impact of R&D Tax Credits on Innovation: A Microeconometric Study on Canadian Firms," Cahiers de recherche, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke 05-01, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  12. Richard R. Nelson, 1959. "The Simple Economics of Basic Scientific Research," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 67, pages 297.
  13. Isabel Busom, 2000. "An Empirical Evaluation of The Effects of R&D Subsidies," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 9(2), pages 111-148.
  14. Giovanni Cerulli, 2010. "Modelling and Measuring the Effect of Public Subsidies on Business R&D: A Critical Review of the Econometric Literature," The Economic Record, The Economic Society of Australia, vol. 86(274), pages 421-449, 09.
  15. José García-Quevedo, 2004. "Do Public Subsidies Complement Business R&D? A Meta-Analysis of the Econometric Evidence," Kyklos, Wiley Blackwell, vol. 57(1), pages 87-102, 02.
  16. Hall, Bronwyn & Van Reenen, John, 2000. "How effective are fiscal incentives for R&D? A review of the evidence," Research Policy, Elsevier, vol. 29(4-5), pages 449-469, April.
  17. Hussinger, Katrin, 2003. "R&D and Subsidies at the Firm Level: An Application of Parametric and Semi-Parametric Two-Step Selection Models," ZEW Discussion Papers 03-63, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  18. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
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Cited by:
  1. Tuomas Takalo, 2012. "Rationales and Instruments for Public Innovation Policies," Journal of Reviews on Global Economics, Lifescience Global, vol. 1, pages 157-167.
  2. Crowley, Patrick & Garcia, Enrique & Quah , Chee-Heong, 2013. "Is Europe growing together or growing apart?," Research Discussion Papers 33/2013, Bank of Finland.

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