The "sugar rush" from innovation subsidies: a robust political economy perspective

The governments of most advanced countries offer some type of financial subsidy to encourage firm innovation and productivity. This paper analyses the effects of innovation subsidies using a unique Swedish database that contains firm level data for the period 1997-2011, specifically information on firm subsidies over a broad range of programmes. Applying causal treatment effect analysis based on matching and a diff-in-diff approach combined with a qualitative case study of Swedish innovation subsidy programmes, we test whether such subsidies have positive effects on firm performance. Our results indicate a lack of positive performance effects in the long run for the majority of firms, albeit there are positive short-run effects on human capital investments and also positive short-term productivity effects for the smallest firms. These findings are interpreted from a robust political economy perspective that reveals that the problems of acquiring correct information and designing appropriate incentives are so complex that the absence of significant positive long-run effects on firm performance for the majority of firms is not surprising.