Barriers to innovation and subsidy e¤ectiveness

This paper explores the effects of R&D commercial subsidies by means of a model of firms’ decisions about performing R&D when some government support can be expected. To estimate the parameters of interest we use an unbalanced panel sample of 1,800 performing and non-performing Spanish manufacturing firms. For the non-performing firms, we compute the trigger subsidies required to induce R&D spending (a measure of market failure). Among the performing …rms, we can detect the ones that would cease to perform R&D if subsidies were eliminated. We also explore the change in the privately financed R&D effort of the performing firms. Results support the claim that market failures are real and subsidies stimulate R&D activities, but also show that actual subsidies go to firms that would have performed R&D otherwise.