Business R&D and the Interplay of R&D Subsidies and Market Uncertainty

Dirk Czarnitzki and Andrew A. Toole

No 06-055, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: The literature suggests that public research and development (R&D) subsidies may reduce market failures affecting private R&D investment caused by incomplete appropriability of knowledge and financial constraints due capital market imperfections. Drawing on the theory of investment under uncertainty, this paper argues that public R&D subsidies increase business R&D investment through an additional mechanism – mitigating the effects of market uncertainty on R&D investment in markets for new products. Using a sample of German manufacturing firms, we show that market uncertainty indeed reduces R&D investment, and that R&D subsidies mitigate the effect of uncertainty. Our findings suggest that public policies aimed at increasing business R&D investment can achieve this objective by reducing the degree of uncertainty in the demand for innovative products.

Keywords: Real Options Theory; Uncertainty; R&D; Censored Regression (search for similar items in EconPapers)
JEL-codes: C25 O31 O33 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ino, nep-ipr, nep-pr~ and nep-knm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:5449

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