INNOVATION POLICY INSTRUMENTS

R&D spending. Another problem faced by the firms is when the financial incentive system
change often and thereby causes uncertainty for the firms (Hall and Reenen, 2000).
Behavioral additionality is a measure to determining how firms change their R&D behavior as a
result of government policy instruments. It differs therefore from the traditional evaluation
which focuses on determining the amount of additional spending on R&D that result from a
government intervention. The behavioral additionality has so far been underdeveloped which is
to be considered as a flaw since it contains many advantages. Behavioral additionality provides
policymakers with a useful vocabulary, reveals qualitative changes in firm conducted R&D and
reveal the procedure firm choose when conducting the R&D when participating in a government
funding programmes (OECD, 2006).
As in the case of fiscal incentives, the financial subsidies to R&D aim to correcting the
underinvestment in private R&D-efforts caused by market failures such as incomplete returns to
knowledge investments. Another factor that influence is the fact that knowledge is partly a
public good with characteristic such as non-excludability, or incomplete financial markets. The
main reasons behind financial subsidies to R&D-efforts are incomplete R&D assessments and
financing constraints in the firms. Financial subsidies can increase the R&D-efforts in firms,
since they decrease the market uncertainty for new products by increasing the expected return
from the R&D-efforts (Czarnitzki and Toole, 2006).
The government has the same difficulties as a bank when handing out financial subsidies. The
government faces adverse selection, problems with monitoring the quality, reliability, credibility,
asymmetric information and general lack of information. The design of the financial subsidy can
easily result in a selection which is directed towards the worst performing firms within a sector.
Governments can stimulate private investments in R&D by subsidies. The problem is however,
that a subsidy often generates little additional R&D-investments. Public subsidies to R&Dinvestments
run the risk of only reducing the private costs of R&D-projects, which would have
been undertaken anyhow, i.e. they crowd-out non-subsidized investments in R&D. Subsidies
may also be given to R&D-investments whose returns are too low from a social point of view.
Often no cost-benefit analyses are made and it is genuinely difficult to evaluate the social returns
of individual R&D-projects. Firms may also take advantage of the system by presenting other
costs to the government claiming that they are R&D-costs. Subsidies can, however, also be
positive and alert firms, in particular SME’s, and their co-operation with public organisations
such as universities. Hussinger (2003) finds that that public funding increases firms’ R&D
expenditure. However, the size of the effect depends on the assumptions imposed by the
particular selection model.
If subsidies are effective, they lead to an increased demand for R&D-personnel and thus to wage
increases for such personnel, if they are in short supply. It is an open question, whether there is a
shortage of R&D-personnel within the EU. Certainly, the situation differs between the different
member states but at least in the case of high level R&D-personnel, the labour market is global
and it should be possible for the different countries to recruit enough personnel given that the
offers are attractive enough.
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