More subsidies, more innovation? Evaluating whether a mix of subsidies from regional, national and EU sources crowds out firm-level innovation

ABSTRACT Policy-makers at regional, national and European Union (EU) levels of governance use a variety of subsidy programmes to stimulate firm-level innovation. Against this backdrop, this paper investigates three important issues that have not received sufficient attention in the literature: (1) whether evaluating the impact of subsidies from each individual source is biased by ignoring firms that receive a mix of subsidies from different sources at the same point in time; (2) whether receiving a mix of subsidies from regional, national and EU sources crowds out firm-level innovation; and (3) if effective, whether subsidy mix stimulates forms of innovation with higher private or social returns. The findings demonstrate that ignoring subsidy mix significantly biases evaluations of subsidies from individual sources. Moreover, subsidy mix can be a highly effective means of stimulating forms of firm-level innovation with the highest social returns, precisely where market and systemic failures are most acute