Effectiveness and Efficacy of R&D Subsidies: Estimating Treatment Effects with one-sided Non-compliance

(with B. Peters)

In evaluating the effectiveness of R&D subsidies, the literature so far has completely neglected the possibility of misappropriation of public funds. This paper contributes to the literature by identifying misappropriation and evaluating the causal effect of R&D subsidies on R&D expenditures when monitoring is weak and misappropriation takes place due to moral hazard behavior. Our analysis is based on Chinese firm-level data for the period 2001-2011. Misappropriation is a major concern as we calculate that 42% of grantees misused R&D subsidies, corresponding to 53% of the total amount of R&D subsidies. Due to one-sided noncompliance to funding contract rules, we differentiate between the intention-to-treat (ITT) effect and the complier average causal effect (CACE). The ITT shows how effective the R&D policy is in practice when misappropriation exists. The CACE, in contrast, depicts how effective it could have been without misappropriation and thus is a measure for the efficacy of the R&D subsidy policy. Combining entropy balancing and IV methods, the ITT estimates show mild partial crowding out of private R&D expenditures. Most strikingly, however, the CACE turns out to be more than twice as large as the ITT and confirms additionality of R&D subsidies. Thus, misappropriation of public funds considerably undermines the efficacy of Chinese R&D programs.

Competition from China in the Product and Input Markets and Innovation in Germany

(with L. Brandt, P. Mohnen and E. Mueller)

We analyze the effect of increasing Chinese import competition on the innovation performance of German firms. Competition takes place in both product and input markets and goods imported from China may originate in either domestically or foreign-owned firms. Using firm-level data for the time period 2000-2014 we take these dimensions of competition into account. Whereas German firms counter competition by foreign firms in the product market by spending more on own R&D, competition in the input market supports their product innovation through the provision of novel and cheaper intermediate inputs. Process innovation is only supported by Chinese competition in the input market from foreign-owned firms.