Does Public Financial Support Stimulate Innovation and Productivity?

The aim of this paper is to contribute to the scarce empirical literature that evaluates the effects of public financial support to innovation on innovation expenditures, innovation, and productivity in developing countries. Propensity score matching techniques and innovation survey data are used to analyze the impacts of public financial support to innovation on Uruguayan firms. The results indicate that there is no crowding-out effect of private innovation investment by public funds, and that public financial support in Uruguay seems to increase private innovation expenditures. Financial support also appears to induce increased R&D expenditures and innovative sales, and these effects are more important for service firms. Public funds do not, however, significantly stimulate private expenditures by firms that would carry out innovation activities even in the absence of financial support. Probably due to the short time frame in which the evaluation was conducted, little evidence of an effect on applications for patents or productivity was found.