The Effect of Public Support on Investment and R&D: An Empirical Evaluation on European Manufacturing Firms

This paper investigates the effect of government support on investment and on R&D expenditure. The empirical analysis is based on a large representative and cross-country comparative sample of manufacturing firms across seven European countries. Estimates from a non parametric matching procedure suggest that public grants have a positive effect both on firms’ investment and R&D, implying that recipient firms spend more than they would have without public aid. This may suggest that the possibility of perfect crowding out between private and public funds can be rejected. More in detail, grants appear to consistently affect traditional investment and similarly, R&D incentives have a positive impact on research spending. The paper also finds that grants trigger the use of long medium term credit suggesting that public policy may possibly help firms facing financial constraints and foster their growth. Finally, the analysis reveals some heterogeneity across the seven countries considered.