1. 1
EXPLAINING HETEROGENEITY
ACROSS FIRMS IN THE EFFECT OF
R&D SUPPORT POLICY
MOVE-IESE-ACC1Ó,
March 9, 2011
Liliana Gelabert, IE
Andrea Fosfuri, UC3M
Josep Tribó, UC3M

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March 9, 2011

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MOTIVATION
• Imperfect appropriability in the production of knowledge
generates underinvestment in R&D activities (Arrow,
Griliches, Jaffe, among others)
▫ Research institutes, national laboratories, etc.
▫ Stronger IPRs
▫ Public support to R&D activity

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MOVE-IESE-ACC1Ó,
March 9, 2011
MOTIVATION
• Are R&D support policies effective?
• Evaluation of public support policies
▫ It is important to understand whether public intervention is
effective or not – public money may be used elsewhere
▫ Large empirical literature attempts to measure effectiveness
(references in the paper)
Surveys by Hall et al. (2000), David et al. (2000), Klette et al.
(2000)
▫ Crowding out of private investment vs. stimulus

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MOVE-IESE-ACC1Ó,
March 9, 2011
Private investment in R&D
Private investmentsupport
Public in R&D CROWDING OUT
Private investment in R&DPublic support
Private investment in R&D Public support
STIMULUS

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MOVE-IESE-ACC1Ó,
March 9, 2011
STIMULUS
• Public support can reduce both the fixed and the marginal
cost of R&D activity
▫ Upgrading facilities for research
• Positive endorsement
▫ Signal of quality reduce the cost of other funds

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MOVE-IESE-ACC1Ó,
March 9, 2011
CROWDING OUT
• Agencies fund projects with higher success probabilities
▫ Public money substitutes private money
• Focus only on subsidized projects
▫ The additional private money on the project comes from other
firm projects

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MOVE-IESE-ACC1Ó,
March 9, 2011
RELATED LITERATURE
• Wallsten (2000) finds that grants provided by the Small Business and
Innovation Program (a program directed to provide grants to small
US firms), crowd-out private financed R&D dollar for dollar
• Busom (1999) analyzes the effect of Spanish government subsidies
on private R&D and employment using a sample of 147 firms, and
finds that for 30% of the firms full crowding out cannot be ruled out
• Lach (2002) reports a strong effect of public subsidies on private
R&D spending in Israel
• Gonzalez et al. (2006) show that some firms become more likely to
start R&D activities as a consequence of the subsidy
▫ Effect is positive but small

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MOVE-IESE-ACC1Ó,
March 9, 2011
However ...
• … we know little about the determinants of effectiveness of
public support
▫ Firm size (Gonzalez et al., 2006; Gonzalez & Pazó, 2006)
▫ Technological opportunities (Gonzalez and Pazó, 2006)
▫ Financial constraints (Hyytinen & Toivanen, 2005)
• Surprisingly, no research on the relationship between
IPRs protection and effectiveness of public support to
R&D
▫ Both are policy instruments, it is important to understand their
interaction

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MOVE-IESE-ACC1Ó,
March 9, 2011
Theoretical relationship between appropriability and
effectiveness of public support
• Intuitive argument: Public support should generate a
greater response when appropriability is weak
▫ Under perfect appropriability a firm’s investment in R&D is close to
the optimum, thus public support would not change it very much
• Certification effect is stronger for firms with weak
appropriability
▫ Quality is easier to communicate when appropriability is high
because of reduced fear of misappropriation

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MOVE-IESE-ACC1Ó,
March 9, 2011
DATA
• Spanish CIS for 2000-2005
▫ Firms receiving any kind of public support to R&D in the last
20 years (exhaustive)
▫ Performing firms (exhaustive)
▫ Random sample stratified by size and sector of non
performing firms
• Unbalanced panel of more than 1000 R&D performing firms
• 5045 firm-year observations (about 25% of firms receive
public support)

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MOVE-IESE-ACC1Ó,
March 9, 2011
CORE VARIABLES
• Dependent variable: Private internal R&D expenses
• Independent variables:
▫ Public support: total amount of public funds received by the
firm to finance internal R&D activities excluding public loans
▫ Appropriability: average index of survey questions about
effectiveness of IPRs to protect innovations
• Controls
▫ Financial constraints, size, start-up, export propensity, skilled
workers, geographical, sector and time dummies, and firm
fixed effects

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MOVE-IESE-ACC1Ó,
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Econometric Issues
• Problem: Endogeneity of public support
▫ What if public support goes to the more innovative
companies?
▫ They will receive more public support and invest more in
innovation
• Remedies
▫ Include several time varying controls and firm fixed effects
▫ Instrumental variables: Instrument for public support is the
public budget by sector and geographical region for R&D
support
▫ Use a matching approach

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Derivative of
private R&D wrt
public support
Stimulus
0.65 Appropiability
Crowding
out

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Robustness checks
• Include External R&D, other funds for R&D
• Disaggregate subsidies from public contracts
• Different measures of appropriability (legal and strategic)
• Correct for unbalanced panel
• Tobit model (because of the zeros)
• Check validity of instruments

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MOVE-IESE-ACC1Ó,
March 9, 2011
Robustness checks: Matching approach
• Estimate a probit model of the probability to obtain public
support
• Use the estimated parameters to obtain predictions about
probabilities of obtaining public support and thus generate
the matching

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MOVE-IESE-ACC1Ó,
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Robustness checks: Matching approach
• Estimate a probit model of the probability to obtain public
support
• Use the estimated parameters to obtain predictions about
probabilities of obtaining public support and thus generate
the matching

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MOVE-IESE-ACC1Ó,
March 9, 2011
Conclusions
• Heterogeneity in the effect of public support
• Firms for which IPRs are more effective invest relatively
less in R&D when they receive public support
• Average effect of public support is 1.25 (1.75 for low
appropriability and 0.60 for high appropriability)
• Importance of allocation stage

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MOVE-IESE-ACC1Ó,
March 9, 2011
Thank you!