## Promoting Innovation: The Differential Impact of R&D Subsidies

_IMF Working Papers, September 23, 2022_

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## Bibliographic details
- Authors: Reda Cherif, Fuad Hasanov, Christoph Grimpe, Wolfgang Sofka
- Published: September 23, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400217968.001

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### Research question and data
- 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.

### Key findings
- 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.

### Implications for innovation and policy design
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2022/09/23/promoting-innovation-the-differential-impact-of-r-d-subsidies-522746_