Subsidy Policy for Innovation : A way to reach objectives of both higher growth and equity ?

Since the Lisbon Agenda (2000), the European Union policies are increasingly oriented towards innovation as attested to by the deep change of the new Regional Policy. This paper proposes an analysis of an innovation subsidy policy in an agglomeration and growth model à la Martin and Ottaviano (1999). In this two-regions model, we assume that the policy is implemented by a central authority that taxes the profit of industrial firms to subsidy employment in innovative activities. We show that the positive effects on growth and equity of such a policy, as highlighted by Martin (1999), hold in the case where the policy is not geographically differentiated. In the case where the government however grants larger subsidies to the poorer region in order to reduce the concentration of the innovative sector, we show that the policy can be inefficient if it is not of sufficient magnitude.