Firm size and innovation policy

Abstract

This study analyses the additionality effects of R&D subsidies on innovation activity: specifically, the allocation of in-house R&D expenditures and economic returns from the innovation process. The magnitude of these effects has been established in the context of a common variable informing the design of innovation policies: firm size. The study reveals that regardless of firm size, public funding stimulates investment within the firm’s technological domain (applied research and technological development), but did not expand the technological knowledge frontier (basic research). The findings also show that R&D subsidies have different additionality effects upon economic returns derived from the innovation process. Although subsidies increased private R&D effort quite significantly in small firms, this only prompted an expansion in the sale of products new for the firm. However, large subsidized firms which only increased investment in technological development improved the sale of products new to the market.