This paper presents microeconometric evidence on financing contraints for research and development activities in German small and medium–sized firms (SME). Special attention is paid to the role of public R&D subsidies. For this purpose SME in Western and Eastern Germany are compared because these regions are very different in their supply of public R&D funding. It turns out that Western German SME are financially constrained in their R&D activities by both internal and external resources. In Eastern Germany, firms are not sensitive to external constraints, possibly due to high public R&D subsidies. The results suggest that R&D in Eastern Germany is to a large extent driven by public subsidies since the German re–unification in 1990 and that the usual financial market mechanisms are repealed with respect to R&D in this region.


Research and development, financial constraints, public funding, SME, censored regression models