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Firm Subsidies and the Innovation Output: What Can We Learn by Looking at Multiple Investment Inputs?
In this paper we address the issue of if and how ﬁrm subsidies foster investment in ﬁxed capital and R&D and by doing so they contribute to the innovation output. We therefore extend the existing literature which so far has mostly focussed on the effects of public subsidies on speciﬁc innovation inputs. By using a rich dataset on Italian ﬁrms we estimate the relationships between inputs (investments) and innovation outputs (process and product) as well as investment equations in which expected ﬁrm subsidies affect the inputs. In order to deal with endogeneity issues we propose an empirical approach which exploits the information and characteristics of our dataset. We ﬁnd that expected public intervention has an effect on investment in ﬁxed capital and innovation. The impact of ﬁrm subsidies on R&D investment is found to be somehow weaker as well as its ﬁnal effect on innovation.