The beneficial effects of R&D grants

A GROWINPRO research found that direct government funding of private R&D is effective in sustaining the innovative efforts and performance of small and medium enterprises

Direct public grants to finance the research and development (R&D) efforts of private firms lead to positive and sizable effects, a GROWINPRO research found.

The paper, The causal effects of R&D grants: evidence from a regression discontinuity, which was recently presented at the NBER Summer Institute and featured in and, focuses on the SME Instrument. Managed by the European Agency for Small and Medium Enterprises (EASME), this is the first European R&D grant program aimed at financing young and small enterprises with projects of high innovation potential.

The research, authored by Pietro Santoleri, Andrea Mina, Alberto Di Minin and Irene Martelli, is based on confidential data on successful and unsuccessful applications from all SME Instrument competitions from 2014 to 2017. The authors leverage the fact that the projects received by EASME for each competition are ranked by independent experts, and that the winners are exclusively selected based on the budget availability of EASME. They take advantage of this mechanism for assigning grants and adopt a regression discontinuity design (RDD) approach to evaluate the impact of R&D grants over several aspects of the innovation-to-market process.

The findings indicate that R&D grants have positive and sizable effects on a wide range of firm-level outcomes: firms invest more, produce more patents, experience faster growth, increase their probability of receiving follow-on private equity while reducing failure chances.

Taken together, the results suggest that public direct R&D support does not trigger “crowding-out” effects, but rather induces superior performances and lays the foundations for future growth through follow-on private investment. The paper also reports that R&D grants tend to alleviate financial frictions and are particularly beneficial for firms in less advanced countries and regions.

Overall the study indicates that pan-European efforts to support private R&D are an effective policy. This is important given the historical difficulty for young and small EU firms in raising capital to carry out and bring to market their innovation projects. Increasing the SME Instrument budget would also be an important target in view of the recent COVID-19 crisis. In times where bank and equity finance might be difficult to secure for innovative firms, R&D grants can represent a useful policy tool to sustain long-term growth opportunities.

Download the working paper here