The effect of public funding on Swedish innovation, 1970-2001

This paper analyses the effects of innovation policy on innovation output. We use a database of Swedish innovations (1970-2001), linked to both approved and non-approved public funding projects, and combine logistic regressions with matching approaches. We address: (1) the characteristics of firms applying for public funding, (2) the effects of public funding on the generation of significant innovations, and (3) whether granting more funding to a project impacts on the importance of the innovation. We find evidence of strong output additionality, as approved public funding projects were twice as likely than non-approved ones to translate into significant innovations. Moreover, our results indicate that firms were more likely to apply for public funding when they had already obtained it previously, were publicly owned, small, and located in major cities. Innovations that applied for greater amounts of public funding were of higher significance. Output additionality was strongest during the 1980s, pointing towards greater importance of public funding when private funding availability is limited, as venture capital became only widely available from the 1990s onwards. This aligns with the finding that output additionality was highest among small firms, whose access to alternative innovation finance is limited.