Working Paper: NBER ID: w7943
Authors: Saul Lach
Abstract: In evaluating the effect of an R&D subsidy we need to know what the subsidized firm would have spent on R&D had it not received the subsidy. Using data on Israeli manufacturing firms in the 1990s we find evidence suggesting that the R&D subsidies granted by the Ministry of Industry and Trade stimulated long-run company-financed R&D expenditures: their long-run elasticity with respect to R&D subsidies is 0.22. At the means of the data, an extra dollar of R&D subsidies increases long-run company-financed R&D expenditures by 41 cents (total R&D expenditures increase by 1.41 dollars). Although the magnitude of this effect is large enough to justify the existence of the subsidy program, it is lower than expected given the dollar-by-dollar matching upon which most subsidized projects are based. This less than full' effect reflects two forces: first, subsidies are sometimes granted to projects that would have been undertaken even in the absence of the subsidy and, second, firms adjust their portfolio of R&D projects-closing or slowing down non-subsidized projects-after the subsidy is received.
Keywords: R&D subsidies; private R&D; Israel
JEL Codes: O32; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| R&D subsidies (O38) | company-financed R&D expenditures (O32) |
| R&D subsidies (O38) | total R&D expenditures (O32) |
| R&D subsidies (O38) | projects that would have been undertaken regardless of the subsidy (H29) |
| R&D subsidies (O38) | adjustments in the firm's R&D portfolio post-subsidy (O38) |
| R&D subsidies (O38) | reduction of private costs of projects (H43) |
| government funding (H59) | displacement of private R&D investments (O39) |