How cost-effective is public R&D in stimulating firm innovation?

This paper assesses the impact of public R&D on firm R&D using patent application data on the county and firm level in Germany. We address the endogeneity of public R&D by employing an instrumental variable estimator that uses lagged institutional funding for research institutes and universities as excluded instruments. We find that one additional public patent application generates 3.5 firm patent applications in the median county, but also that the relationship turns negative for high levels of public R&D. We estimate the public costs per firm patent to be between 0.8 and 1.5 million EURO