Business R&D and the Interplay of R&D Subsidies and Market Uncertainty
ZEW Discussion Paper No. 06-055 // 2006Real Options Theory, Uncertainty, R&D, Censored Regression�t (R&��@ubsiÐå€ may����uce ����et f����res affecting private R&D investment caused by incomplete appropriability of knowledge and financial constraints due capital market imperfections. Drawing on the theory of investment under uncertainty, this paper argues that public R&D subsidies increase business R&D investment through an additional mechanism ? mitigating the effects of market uncertainty on R&D investment in markets for new products. Using a sample of German manufacturing firms, we show that market uncertainty indeed reduces R&D investment, and that R&D subsidies mitigate the effect of uncertainty. Our findings suggest that public policies aimed at increasing business R&D investment can achieve this objective by reducing the degree of uncertainty in the demand for innovative products.
Czarnitzki, Dirk and Andrew Toole (2006), Business R&D and the Interplay of R&D Subsidies and Market Uncertainty, ZEW Discussion Paper No. 06-055, Mannheim.