Subsidising innovation over the business cycle

Isabel Busom () and Jorge-Andrés Vélez-Ospina

Industry and Innovation, 2021, vol. 28, issue 6, 773-803

Abstract: We investigate whether the impact of direct support for business investment in R&D and innovation varies over the business cycle. We study whether firms that obtain public support in a recession differ from firms that obtain it during expansions; whether the impact of support is smaller in recessions than in expansions, and whether effects vary with the treatment pattern. Using firm-level data from Spain during the period 2005 to 2014, we combine propensity score matching and difference-in-differences methods to estimate firms’ response. We find that (i) while the impact of support on monetary investment in innovation is pro-cyclical, it is counter-cyclical in terms of the employee-time allocation to innovation activities; (ii) the additionality of a one-year treatment is smaller than that of a longer treatment. Direct public support may have thus prevented a decline of the firms’ knowledge capital during the recession.

Date: 2021
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Working Paper: Subsidising Innovation over the Business Cycle (2020)
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DOI: 10.1080/13662716.2020.1801388

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