UK and EU subsidies and private R&D investment: Is there input additionality?

Business research and development (R&D) expenditures in the UK is low by international standards. To encourage investment, the UK government has been providing both direct and indirect support. The aim of this paper is to address four inter-related and policy-relevant questions: (i) what do we know about the UK regime for direct grant schemes? (ii) is the UK subsidy complementary or substitute for privately-funded R&D? (iii) does the UK funding regime differ from the EU regime in terms of selection and effect? (iv) does the scope for complementarity/additionality differ between different rates of funding? We address these questions using a rich dataset for more than 44 thousand UK firms from 1998-2012; and a range of treatment-effect estimators with and without control for selection. We report that the EU selection regime is more likely to support firms with long-term R&D plans. In addition, the UK subsidy is not associated with additionality, but the EU subsidy is. Finally, leverage estimations indicate that targeting a particular rate of subsidy is not likely to make a difference to private R&D effort in the UK subsidy case; but an increase in EU subsidy intensity does create leverage among firms that fall between the median and 75th percentile of the subsidy intensity distribution.