Financing Innovation : Evidence from R&D Grants

Governments regularly subsidize new ventures to spur innovation. This paper conducts the first large-sample, quasi-experimental evaluation of R&D subsidies. I use data on ranked applicants to the U.S. Department of Energy's SBIR grant program. An award approximately doubles the probability that a firm receives subsequent venture capital and has large, positive impacts on patenting and commercialization. These effects are stronger for more financially constrained firms. Certification, where the award contains information about firm quality, likely does not explain the grant effect on funding. Instead, the grants seem to reduce investor uncertainty by funding technology prototyping