When Do R&D Subsidies Boost Innovation? Revisiting The Inverted U-Shape

The authors show theoretically that a proportional R&D subsidy accelerates innovation activity at all degrees of competition in the modern Schumpeterian growth model, but less so at high degrees of competition. They then use company-level data on patenting activity, product market competition and R&D subsidies of Finnish firms during 1990 - 2001 to test the theoretical prediction. The empirical findings can be summarized as follows. Firstly, they find relatively strong evidence in favor of the inverted U-shape between competition and innovation. Secondly, they find some evidence that a direct R&D subsidy increases innovative activity at all but very high degrees of competition.