The effect of output additionality of public funding support on firm innovation. Evidence from firms of different sizes

Abstract The article aims to study the effect of output additionality of public innovation funding on firm innovation, measured as economic returns of innovation, across firms of different sizes. A panel sample consisting of 4125 Spanish firms observed during years 2009–2014 has been analysed, using a treatment model. Robustness tests have also been used. The findings show the effects of output additionality of innovation funding support for small, medium and large firms, with a greater effect on large firms and a lower effect on medium firms. However, there has a weak effect for very large firms, which do not benefit in terms of output additionality. Since it is relatively easy for large firms to benefit from public support for innovation, some of the resources allocated to them should be passed on to small and medium firms. Medium firms seem to be less inclined to benefit from economies of scales than large firms and may be less affected by public innovation policy given the priority for small firms' development. Small and medium enterprises can benefit further from well‐designed targeting programmes, with a prevalence of demand‐side support measures compared to the supply‐side measures.