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Do R&D Subsidies Stimulate or Displace Private R&D? Evidence from Israel, Science, Technology and the Economy Program (STE) - Working Papers Series STE-WP-1

Researchers
Prof. Saul Lach
Cite As:
Lach Saul . Do R&D Subsidies Stimulate or Displace Private R&D? Evidence from Israel, Science, Technology and the Economy Program (STE) - Working Papers Series STE-WP-1 Haifa Israel: Samuel Neaman Institute, 2000. https://www.neaman.org.il/EN/Do-RD-Subsidies-Stimulate-Displace-Private-RD-TE-WP-1
Download files:
STE1.pdf(450KB)

In evaluating the effect of an R&D subsidy we need to know what the subsidized firm would have spent on R&D had it not received the subsidy Using data on Israeli manufacturing firms in the 1990s we find evidence suggesting that the R&D subsidies granted by the Ministry of Industry and Trade stimulated long-run company-financed R&D expenditures: their long-run elasticity with respect to R&D subsidies is 0.22.

 

At the means of the data, an extra dollar of R&D subsidies increases long-run company-financed R&D expenditures by 41 cents on average (total R&D expenditures increase by 1.41 dollars).

 

Although the magnitude of this effect is large enough to justify the existence of the subsidy program, it is lower than expected given the dollar-by-dollar matching upon which most subsidized projects are based. This “less than full” effect reflects two forces: first, subsidies are sometimes granted to projects that would have been undertaken even in the absence of the subsidy and, second, firms adjust their  portfolio of R&D projects—closing or slowing down non-subsidized projects—after the subsidy is received.

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