Page 9 - IDEA Study 8 2017 Direct subsidies and R&D output in firms

hold only for R&D outputs that are relevant locally but not in major foreign markets, for which new knowledge at the global technological frontier is generally required. Since the subsidies were justified on the grounds of promoting competitiveness and growth of firms, which in the Czech context implies expansion in foreign markets, the results indicate that at least in this respect the programmes have fallen short of expectations. Literature review The basic argument for using public R&D support programmes to stimulate innovation stems from the “public good” characteristics of R&D investments and market failures associated with it (Arrow, 1962). Firms might not have the capacity to appropriate the returns to their R&D investments in full, while other firms have opportunities to free- ride. Therefore, despite being socially valuable, private R&D investments are below a socially optimal level, and privately-funded projects are either not executed or are executed on a lower scale. Furthermore, there is a problem associated with information asymmetry about R&D projects even if the firms could fully appropriate their returns (Hall, 2002). As R&D projects are risky, the assessments of project returns by borrowers and lenders could differ. There are barriers to sharing too many details about R&D projects between the inventor and the prospective funder due to concerns about disclosure to competitors. R&D outcomes are often intangible, which limits their applicability as a loan security (Močnik, 2001; Ughetto, 2008). As a result, socially desirable R&D projects may not be funded externally from private sources (Stiglitz & Wallsten, 1999; Stiglitz & Weiss, 1981). The highest benefits of public R&D subsidies could, possibly, come from targeting specific firms that suffer severe financial constraints. For example, younger and smaller firms such as start-ups and academic spin-offs, which have little business experience, in many cases, have to rely on limited internal funds as a source of R&D investment (Zúñiga- Vicente, Alonso-Borrego, Forcadell, & Galán, 2014). As a result, public subsidies that support R&D for these firms would be desirable. At the same time, certain public policy goals, such as spillovers, are more difficult to achieve in SMEs than in large firms (Cunningham, Gök, & Larédo, 2012). Although the goals of R&D support programmes could be quite diverse, the most important question for defining their efficiency is whether R&D subsidies complement 7