How and when can subsidies be effectively used to induce entry into R&D? Micro-Dynamic evidence from Spain.

Pere Arque, University of Barcelona

This paper investigates how subsidies can be effectively used to induce entry into R&D. To carry out the analysis it is taken into account that R&D activities exhibit persistence over time and that such persistence is partly due to true state dependence. This means that performing R&D in one period has a positive causal effect on the probability to perform R&D in subsequent periods too. Properly acknowledging the existence of real
state dependence is important since it can significantly enhance the effectiveness of “entry subsidies”. The mere change in firms’ status caused by the subsidy will activate the synergies inherent to state dependence and increase their probability to persist in R&D. If synergies were acute enough, the subsidies could eventually be withdrawn without the firm quitting R&D
activities. This intuition is formally developed by modelling firms’ decision
to perform R&D in a dynamic setting in which some government support can be
expected. To ascertain whether there is scope for effectively inducing entry by
means of subsidies I exploit a balanced panel data set containing 729 Spanish
manufacturing firms observed over a minimum of 9 consecutive years during the period 1990-2002. A range of linear and discrete dynamic panel data models are implemented and true state dependence is estimated to be between 28% and 36%. That is, firms which performed R&D at t-1 have a probability of performing R&D at t around 30% times larger than firms which did not perform R&D at t-1. From this measure of state dependence I calculate that almost 10% of the firms in the sample can be permanently induced into R&D activities by means of a punctual trigger subsidy.

Venue: UNU-MERIT Conference room.

Date: 06 May 2009

Time: 16:00 - 17:00