Playing the innovation subsidy game: Experience, clusters, consultancy, and networking in regional innovation support

Abstract

Abstract Government support to promote firm-level innovation is seen as a crucial factor for economic growth. This support is frequently channeled through firm-level subsidies. Despite their relevance within the policy portfolio, there is an open academic debate on whether subsidies are effective for innovation. This is by no means related to a potential inadequacy of subsidies, but because the mechanisms of assignment may be unsatisfactory. We argue that this may be the case when subsidies are awarded to larger firms with a solid international and innovative trajectory or to those that know how toplay the system,” rather than to the most deserving firms and projects. To test whether this is the case, we use data from 17,866 applicants for innovation subsidies managed by the Valencian Institute of Competitiveness. We find that firms with specific knowledge accrued through previous submissions, public funding and grant consultancy or cluster location, are the main beneficiaries of public innovation support, generally at the expense of more promising candidates that lack the know-how to navigate a complex and often flawed process. This inertia gets policy-makers stuck in a sub-optimal assignment system that should be deeply reconsidered.