Direct and cross scheme effects in a research and development

Research and product or process development are two distinct, yet complementary innovation activities. Making use of a specific grant-based policy design that explicitly distinguishes between research projects, development projects, and mixed R & D projects, this study estimates the direct and cross scheme effects on both research and development investments of recipient firms. Positive cross scheme effects can be expected when research and development activities are complementary and financing constraints are more binding for research than for development projects. The results show that while research grants yield positive direct effects on net research spending as well as positive cross effects on development, development grants are less effective for stimulating development expenditures. The positive effect of development grants on overall R & D stems from cross effects of development grants on research expenditures. These results suggest a higher priority for subsidies targeting research projects.