Promoting Innovation: The Differential Impact of R&D Subsidies

IMF Working Papers, September 23, 2022

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Investigates the effect of R&D subsidies on firms’ innovation by ownership, industry, and firm size using German firm-level data.
Focus on distinctions between domestic firms, domestic MNCs, and foreign MNC subsidiaries across industries including low-tech manufacturing, medium-tech manufacturing, high-tech manufacturing, knowledge-intensive services, and technological services.

The impact of R&D subsidies is heterogeneous across industries for multinational corporations (MNCs) and domestic firms.
The impact of R&D subsidies does not differ substantially by firm size.
Domestic firms:
- Have a larger response in R&D spending in low-tech manufacturing, knowledge-intensive services, and technological services.
Multinational corporations (MNCs):
- The response of domestic and foreign MNCs in R&D spending is broadly similar and is greater in medium-tech and high-tech manufacturing.
Foreign MNC subsidiaries:
- Their response in terms of patents is greater than that of domestic MNCs in most industries.

Policy targeting of R&D subsidies should account for industry heterogeneity and ownership structure:
- Subsidies may stimulate R&D spending more among domestic firms in low-tech manufacturing, knowledge-intensive services, and technological services.
- Subsidies may stimulate R&D spending more among MNCs (both domestic and foreign) in medium-tech and high-tech manufacturing.
- Patent-generation effects may be particularly strong for foreign MNC subsidiaries relative to domestic MNCs, suggesting differential knowledge-output outcomes by ownership.
Because firm-size heterogeneity is limited, subsidy design may prioritize industry and ownership considerations over firm-size targeting.