Complementary Policies” Substitutes? Evidence from R&D Subsidies in the UK

SITE (Science, Innovation, Technology, and Entrepreneurship)

Speaker:Jacquelyn Pless, MIT
Date: Tuesday 17 November 2020
Time: 15:00
Location: Zoom link available from

Further details

Abstract This paper studies whether direct subsidies and tax credits for private research and development (R&D) are complements or substitutes. Governments often subsidize private R&D using both, but the ways in which they interact affect the optimal policy mix and are not well understood. I implement two quasi-experimental research designs using funding rules that generate exogenous variation in the cost of investing in R&D and find that grants and tax credits are complements for small firms but substitutes for larger firms. An increase in the tax credit rate enhances the effect of grant funding for small firms so much that R&D expenditures double, which can be explained by financing constraints, yet it cuts the positive effect of grant funding in half for larger firms. Innovation policy should include both interventions for small firms but only the one with the greatest returns for larger firms.