Selection of projects to the Portuguese innovation incentive system

It is often argued that public policies to support investment and innovation play a vital role when firms have difficulties in accessing external finance. However, several studies have demonstrated that public support can have no effect on the policy targets or even have a negative effect on firm performance. One explanation for these findings could be the selection process to participate in public support programs.

The aim of the article is to assess differences in investment project characteristics (expected impact) between firms with approved and non-approved applications and to understand which kinds of projects are selected for a subsidy. The analysis is focused on the case study of applications submitted to the Portuguese Innovation Incentive System (SI Innovation) between 2007 and 2013.

The results show that firms with approved applications are those that expect to invest more and forecast a higher increase in exports and productivity as the result of the investment project. However, these firms have investment projects with a lower contribution for growth and lower economic efficiency (return on investment in terms of productivity). Micro and small firms, which are usually more financially constrained, are less likely to receive the subsidy.

As policy recommendations, the authors defend that in determining where subsidies should be applied, consideration should be given to the marginal value of each euro invested, which describes both the growth prospects of the project and the financial needs of the firm. For example, assessment of firms’ applications could contemplate a section destined to evaluate if the firm is able or not to obtain financing through other sources. Indeed, if the public support goes to firms that would be willing to make the investment without the public subsidy, in the end, the added value of European funds may not be fully achieved.

Click here to go to the paper by Anabela Santos, Michele Cincera, Paulo Neto, Maria Manuel Serrano.