Do R&D Grants Work? New Research Shows A Firm's Size Matters
A European study reveals subsidies boost innovation investment in SMEs but large firms prefer to use public money to substitute, not increase, R&D spending.
Government grants for business research and development (R&D) helped small and medium-sized companies spend more and attract private investment. But for large firms, these grants actually seemed to replace private funding, according to new research using data from the Czech Republic ("Crowding in or crowding out? Evidence from discontinuity in the assignment of business R&D subsidies" by Matěj Bajgar and Martin Srholec).
Why it matters: Governments worldwide spend billions on R&D direct grants, loans, and procurement contracts (over $50 billion each year in developed countries). They hope this encourages companies to innovate more than they would on their own, thinking that sometimes good ideas don't get funded because of risks or information gaps. Knowing who these grants help and how they help is important for making good policies. Past studies have shown mixed results, partly because it's hard to prove cause-and-effect and get good data. This study shows that who gets the grant matters a lot.
About The Paper: The researchers used a strong method called regression discontinuity (RD) to study the effects of a major Czech R&D grant program called "ALFA." This method helps figure out the real impact of the grants.
The Program: ALFA gave out about 340 million euros between 2011 and 2018. It funded research projects (usually lasting 3-4 years) in areas like advanced technology. Companies often worked with universities or research groups. The average grant for a company was about 190,000 euros, which was often small compared to the company's total R&D spending (around 1.3 million euros) or sales (around 36 million euros). The grants covered costs like salaries, materials, and sometimes equipment.
The Setup: ALFA gave grants based on scores from expert reviews. Companies whose project scores were just above the cutoff score needed to get funding were compared to companies whose scores were just below. Because these companies were likely very similar in other ways, this comparison helps show the true effect of the grant. The researchers used standard statistical techniques for this type of analysis.
The Data: A key part of the study was linking official records about ALFA applicants and their scores with detailed, private data about the companies from the Czech Statistical Office (CZSO). This data covered 2007 to 2021 and included how much companies spent on R&D (total, private funding, government funding), patents, sales, number of employees, and productivity. Having this direct R&D spending data was a big advantage over many past studies. The study looked at 994 company projects after matching data and removing extreme cases.
Data & Insights:
The researchers carefully checked their method (making sure scores weren't manipulated near the cutoff and that companies just above and below the cutoff looked similar before the grants). They found very different results depending on the company's size:
SMEs Get a Boost (Companies with fewer than 250 employees):
More Private Money: Grants strongly encouraged SMEs to spend more on R&D. During the grant period, their total R&D spending went up by about 71%. Importantly, their spending using private money also went up significantly (by about 156%). This means the grants brought in additional private investment. For every 1 euro of grant money, SMEs spent about 2.3 euros more on R&D in total.
Lasting Effects: The boost to R&D spending lasted long after the grant money ran out (up to 8 years later). Total R&D spending was about 186% higher in the years after the grant ended. This seems connected to the fact that companies that got ALFA grants were more likely to get future grants from the same government agency (TA CR), but not from other government sources. The effect came from spending on current costs (like salaries), not from buying long-term equipment with the initial grant.
Performance: SMEs that got grants saw a short-term increase in their sales per employee (about 18% higher during the grant period).
Limits: However, the grants didn't lead to more patents, long-term growth in sales or productivity, or more jobs for these SMEs near the funding cutoff. This might mean the projects funded right at the edge were smaller steps rather than big breakthroughs.
Large Firms React Differently (Companies with 250 or more employees):
No Boost: Grants did not increase total R&D spending for large firms. The results were near zero or even negative.
Less Private Money: Evidence showed that grants replaced private R&D spending in large firms. Their spending from private funds went down significantly (by about 38%) during the grant period. They basically used the government money instead of their own.
Why the Difference?
Money Problems: Financial challenges seemed to be a big reason. Grants had much stronger positive effects on companies that likely had trouble getting funding elsewhere (based on a financial health score called the Altman Z-score). The effects on financially healthy companies were small or zero. (Company age wasn't a good indicator here because most companies in the study were older).
Grant Size: The positive effect was also bigger when the grant amount was larger compared to the company's usual R&D budget.
Between the lines: This study is strong because it used a reliable method (RD) and had direct data on R&D spending, allowing clear conclusions about whether private money was added or replaced. The long timeframe showed that getting one grant can lead to more grants from the same agency later. For large companies without money problems, grants might just pay for R&D they would have done anyway. For SMEs, grants can make R&D possible that wouldn't happen otherwise and build connections with funding agencies, even if the results aren't major new inventions right away. The study confirmed its results held up even when changing details of the analysis.
The bottom line: R&D grants work differently for different companies. They seem very effective at encouraging more R&D spending in smaller companies by helping them overcome funding challenges and building relationships with the grant agency. But giving grants to large, financially stable companies might just be substituting public funds for money they would have spent anyway, without increasing overall R&D. To get the most "bang for the buck," targeting grants towards companies that genuinely need the financial help seems important. This ensures public money supports truly additional R&D activity. These conclusions apply most clearly to projects near the funding cutoff; projects that scored much higher might have had bigger, more groundbreaking results.