Effects of multilevel policy mix of public R&D subsidies: Empirical evidence from Japanese local SMEs

First Draft:March 2019; This Version:January 2020Regional innovation policies have been implemented in several countries. In Japan, the controlled decentralization of traditionally centralized innovation policy is ongoing. Thus, we can observe the multilevel policy mix of public R&D (research and development) subsidies by national, prefecture, and city governments. However, empirical studies on multilevel R&D support, using panel data and considering the municipality level, are scarce. Based on original survey data and on the financial data for manufacturing SMEs (small and medium sized enterprises), we estimate their TFP (total factor productivity) and we empirically investigate the effects of public R&D subsidies by national, prefecture, and city governments. We employ firm-level fixed effect panel estimation to control for the effects of any unobservable time-invariant factors. We find that, with a two year lag, city and prefecture subsidies show positive and significant effects on TFP, which also persisted after the subsidy period. However, multilevel subsidies, especially those involving city subsidies, additionally and persistently increase recipients’ TFP. These results suggest significant advantages for the multilevel policy mix, especially those involving the city subsidy.35 p