It remains an open empirical question whether public R&D grants complement private companies’ R&D investments. They would do so, if they encouraged firms to undertake projects that would otherwise be unrealized or those which would be realized on a significantly smaller scale. Otherwise, subsidized firms would end up substituting public R&D grants with their own funding. Results of most prior evaluation studies on this topic have been misleading due to various reasons, however. Often, such studies were based on the assumption that government R&D grants are allocated randomly to firms. Increasing evidence suggests, however, that public policy- makers tend to cherry-pick the participants in such programs (Heckman, 2011; Hussinger, 2003). Moreover, government awardees also happen to be companies with the best ideas and stronger incentives for spending their own resources prior to applying for such support programs.

We seek to assess the extent to which firms receiving public R&D grants would have invested, had they not benefited from such government funding, by employing a so-called ‘counterfactual approach’ (Rosenbaum and Rubin, 1983).