Labor demand effect of public R&D funding

This paper analyzes the employment effects of publicly subsidized R&D. The basic, very stylized line of reasoning underlying this question is that public subsidies for R&D foster innovation; innovation, in turn, causes firm growth, which, in turn, also increases the firms' labor demand. The nexus of publicly subsidized R&D and the labor demand effect is usually treated in two distinct steps. The first step studies the direct output of the research activity and asks whether publicly subsidized R&D programs increase the companies' rate of innovation. The second step derives how the outcomes of the research activity (innovations, patents, etc.) influence the firms' labor demand. In this research we merge both steps. We directly analyze whether companies that received public subsidies show a differential labor demand subsequent to being subsidized. We test the hypothesis using data on a panel of Finnish firms consisting of subsidized as well as of not subsidized firms. To eliminate the selection bias and to estimate the impact of the subsidies we use a kernel-based matching and a diffs-in-diffs estimation. The results of this study support the hypothesis that public subsidies have a positive impact on companies' innovative output. They also establish an empirical link between the funding and the companies' subsequent labor demand. Public subsidies for innovation are found to have a positive influence on the companies' employment.