Firm Subsidies and the Innovation Output: What Can We Learn by Looking at Multiple Investment Inputs?

Abstract In this paper we address the issue of if and how firm subsidies foster investment in fixed capital and R&D and by doing so they contribute to the innovation output. We therefore extend the existing literature which so far has mostly focussed on the effects of public subsidies on specific innovation inputs. By using a rich dataset on Italian firms we estimate the relationships between inputs (investments) and innovation outputs (process and product) as well as investment equations in which expected firm subsidies affect the inputs. In order to deal with endogeneity issues we propose an empirical approach which exploits the information and characteristics of our dataset. We find that expected public intervention has an effect on investment in fixed capital and innovation. The impact of firm subsidies on R&D investment is found to be somehow weaker as well as its final effect on innovation.