Public funding and firm innovation: evidence from Germany

This study draws on microdata from 1198 German enterprises participating in the 2018 Community Innovation Survey (CIS) to assess the causal impact of public financial support on firms’ innovation outcomes. Based on the theoretical rationale for public intervention in response to market failures, financial constraints and information asymmetries, the analysis uses propensity score matching (PSM) to address selection bias due to the non-random allocation of public funding. Propensity scores are estimated based on a logit model that controls for firm-level characteristics such as size, age, human capital, innovation expenditure, cooperation patterns, and regulatory influences. The findings suggest that public support significantly increases the propensity to introduce innovation, with stronger effect among firms that are already characterized by structured innovation processes and established collaborative networks. The policy implications point to the need for more differentiated, SME-oriented instruments, as well as reduced administrative burdens for smaller firms. This would enhance the accessibility and operational efficiency of support measures and ensure they reach enterprises with high innovation potential but limited organizational resources. Furthermore, the significant impact of R&D investment, innovation expenditure, and collaboration with research organizations highlights the risk that current funding practices may repeatedly benefit the same firms, thereby restricting access to resources for emerging enterprises and limiting their innovation activities.