On The Impact of Public Subsidies and Research on Private R&D

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Private businesses thrive to remain competitive in both local and global markets. One way of delaying these businesses' maturity and achieving sustainable growth rates is to invest massively in research and development (R&D) to enhance and introduce new products that strengthen their market positions. This vision is not solely driven by the private sector since governments are also concerned about the economic growth and advancements in the local products that would bring sufficiency in the local market and enhance their balance of trade. Therefore, several policy tools were implemented to stimulate private investment in R&D. However, the outcome of subsidizing these private entities may not necessarily be the stimulation of higher private investments in R&D. In this work, we revisit and investigate the impact of government subsidies on private R&D, taking into account both direct and indirect supports. Direct support includes direct government grants and tax credits provided to private entities performing research. The outcome of these policy instruments may stimulate and "crowd-in" higher private R&D, "crowd-out" and substitute the initial investments, or may not significantly impact the strategic investments R&D by the private sectors. We also examine the impact of the government expenditure on public R&D, namely government laboratories, and higher educations research, on private R&D. This considered as indirect support to private research since research performed in these public entities should provide positive spillovers that stimulate private R&D. However, this may lead to a rise in the input cost of private R&D since both public and private R&D are competing to hire skilled labor which a scarce resource and the outcome of this competitions may lead to crowd-out private R&D investments and negative spillovers. We employ two econometric models to address our research questions. We utilize the Fixed Effect (FE) model to examine the impact of the direct and indirect support on private R&D. We also evaluate the effectiveness of employing policy instruments simultaneously on stimulating private R&D. Our analysis includes the interaction between the direct and indirect supports and their influence on private R&D expenditures. We also investigate the impact of the instability of the policy tools on private investment in research. We investigate our research questions in dynamic settings since their past investment positions could explain the current R&D. Therefore, this work also incorporates examinations on the impact of public R&D expenditure on private R&D investment using the Generalized Method of Moments (GMM) model, which is known to have better control to mitigate the endogeneity problems.