Doctoral Dissertation Research: The direct and indirect effect of innovation subsidies

Government subsidies to support innovation in firms are a widespread policy. However, little is known about their effectiveness to promote technological upgrading and boost firm performance in developing countries. The existing rigorous studies about this type of intervention are focused on developed countries and high-tech industries, and infer technological improvement from patents and R&D expenditure. As a consequence, lessons are hard to extrapolate to the developing country context, where innovation is concentrated on the adoption of already established technologies and on performing small modifications to existing products, which are not suitable for patenting and can be hardly considered R&D. This project fills this gap in the literature by investigating the direct and indirect effects of innovation subsidies in Peru, a developing country, using directly collected data on technology use. The project opens the black box of the firm and allows to observe the changes that are triggered within a company when it receives support for innovative activities, shedding light on the mechanisms through which government support for innovation affects firm performance. The findings of this research advance understanding of the relationship between innovation subsidy programs and firm behavior, and also inform policy design in developing countries and international cooperation institutions, which have played an important role in the diffusion of interventions to promote productive development.

The key challenge of the project is detecting technological change in a context in which R&D expenditure and patents cannot be used to do so. Given that details on productive methods used by businesses are not regularly recorded in enterprise surveys, the project includes the collection of data on productive practices used by the firms that applied to the subsidy programs under analysis. To establish a causal relationship between the innovation subsidy programs and firm behavior, the project uses a quasi-experimental method. In particular, it exploits the fact that the subsidy assignment mechanism is based on a score assigned to the applications by experts. Applications with scores above a certain threshold get a change to win the subsidies; while those with lower scores, do not. This characteristic makes the setting suitable for a regression discontinuity analysis. The project further explores spillovers operating through labor mobility and procurement relationships. These are two channels capable of transmitting information between companies and, therefore, it is worth assessing the extent to which they contribute to the diffusion of innovative ideas and of the benefits of innovation subsidies.

This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.