Page 7 - IDEA Study 8 2017 Direct subsidies and R&D output in firms

Introduction The relevance of public support for business R&D is highly debated (Cunningham et al. 2012). As government takes an active part in financing business R&D activity, there is a growing need to understand how effective such subsidies are and whether they achieve their goals. Policy makers and taxpayers are rightfully concerned that public funds are used to support R&D projects that firms would carry out anyway, hence that the additionality effect is low (David et al. 2000 and Klette et al. 2000). Addressing these concerns and thoroughly evaluating R&D subsidy programmes is important for policy credibility, policy learning and maximizing the desired social impacts. R&D support for business enterprises usually takes the form of direct subsidies (also called “cash grants”) awarded on a competitive basis or indirect subsidies through tax credits (EY 2014). In the Czech Republic, direct R&D subsidies have been provided on a continuous basis through a variety of programmes since at least 1993 and a system of R&D tax deductions was introduced in 2005. According to OECD (2017), 0.11% of GDP was redistributed as direct government funding and 0.05% as indirect government support for business R&D expenditures in the Czech Republic in 2014. Hence, direct R&D subsidies are a traditional and dominant tool in Czech innovation policy. Rigorous evaluation of R&D subsidy programmes is routinely performed in many advanced countries. As shown in the surveys by Cunningham, et al. (2012) and Zúñiga- Vicente, et al. (2014), there are dozens of estimates of the additionality effects of public subsidies in the scholarly literature. The principle of what has been dubbed as “counterfactual evaluation” in evaluation circles are promoted by the European Commission (2014). Nevertheless, public R&D programmes have been poorly evaluated in the Czech Republic (Arnold and Mahieu 2011, Srholec and Szkuta 2016). In fact, so far, no Czech R&D support programme has undergone an ex-post evaluation that stands up to international standards (Srholec 2015). National guidelines for the evaluation of R&D programmes are underdeveloped and the government is doing little to tackle this problem. That said, there have been some notable bottom-up efforts recently. Horák (2016) and Srholec (2016) outlined how the principles of counterfactual evaluation can be used in the Czech context, which if fully implemented, have the potential to improve the situation. In particular, the Technology Agency of the Czech Republic (TA CR), established in 2009, has been investing in evaluation capabilities and has already performed promising ex- 5