Efficient Innovation Policy Increases High-productivity R&D Work

Our work applies the model developed by Acemoglu et al. (2018), henceforth, AAABK, for assessing the growth and welfare implications of different types of innovation policies. Central to the AAABK model is the ratio of high-productivity and low-productivity firms in total output and how different policy measures affect this relationship. We employ the AAABK framework to build a macroeconomic model of the innovative business sector in Finland and fit it to the company-level micro-data on Finnish companies from 2000 to 2016. We find that, generally, increasing R&D subsidies would be a recommendable policy in Finland. The welfare impacts of R&D subsidies are highest when they accelerate the re-allocation of R&D workers to companies with high R&D productivity. The most effective innovation policy targets R&D subsidies to companies with the highest innovation capacity (i.e., in these companies, R&D employees generate the highest increase in a firm’s productivity). If subsidies are allocated to companies with low innovation capacity or to low-productivity companies that are close to exiting the market, there will be less innovation and slower economic growth. An optimal subsidy policy would drive incumbents with low R&D productivity to exit.