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Business R&D and the Interplay of R&D Subsidies and Market Uncertainty

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  • Czarnitzki, Dirk
  • Toole, Andrew A.

Abstract

The literature suggests that public research and development (R&D) subsidies may reduce market failures affecting private R&D investment caused by incomplete appropriability of knowledge and financial constraints due capital market imperfections. Drawing on the theory of investment under uncertainty, this paper argues that public R&D subsidies increase business R&D investment through an additional mechanism – mitigating the effects of market uncertainty on R&D investment in markets for new products. Using a sample of German manufacturing firms, we show that market uncertainty indeed reduces R&D investment, and that R&D subsidies mitigate the effect of uncertainty. Our findings suggest that public policies aimed at increasing business R&D investment can achieve this objective by reducing the degree of uncertainty in the demand for innovative products.

Suggested Citation

  • Czarnitzki, Dirk & Toole, Andrew A., 2006. "Business R&D and the Interplay of R&D Subsidies and Market Uncertainty," ZEW Discussion Papers 06-055, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:5449
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    References listed on IDEAS

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    2. Maxim Bouev & Ilia Manaev & Aleksei Minabutdinov, 2013. "Finding the Nearest Valid Covariance Matrix: An FX Market Case," EUSP Department of Economics Working Paper Series Ec-07/13, European University at St. Petersburg, Department of Economics.
    3. Robin Kleer, 2008. "Government R&D Subsidies as a Signal for Private Investors," Working Papers 066, Bavarian Graduate Program in Economics (BGPE).

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    More about this item

    Keywords

    Real Options Theory; Uncertainty; R&D; Censored Regression;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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