Do Subsidies to Commercial R&D Reduce Market Failures - Microeconomic Evaluation Studies?

A number of market failures have been associated with R&D investments and significant amounts of public money have been spent on program to stimulate innovative activities. In this paper, we review some recent microeconometric studies evaluating effects of government sponsored commercial R&D. We pay particular attention to the conceptual problems involved. Neither the firms receiving support, nor those not applying, can be considered random draws. Furthermore, those not receiving support are often affected by the programs, and spillover effects are often a main justification for R&D subsidies. Constructing a valid control group under these circumstances is challenging, and we relate our discussion to recent advances in econometric methods for evaluation studies based on non-experimental data. We also discuss some analytical questions that need to be addressed in order to assess whether R&D support schemes can be justified. For instance, what are the implications of firms' R&D investments being complementary to each other and to what extent are potential R&D spillovers internalized in the market?