R&D and innovation policy is a priority for advanced economies, addressing market and system failures that lead to private underinvestment in these areas. Direct subsidies for firm R&D are a key policy instrument, allowing governments to target projects with high social returns. In theory, if policymakers can identify such projects, direct funding can effectively stimulate private sector R&D. However, there is no guaranteed mechanism ensuring that subsidies reach projects facing market or system failures, making the allocation process crucial to their effectiveness. Despite the growing interest in innovation promotion policy, the analysis of allocation processes has been largely overlooked in mainstream literature. Given the potential distortions these processes can create, it is essential to explore this issue in depth. This dissertation examines the allocation of R&D subsidies to firms both theoretically and empirically, utilizing a unique dataset from a special subsidy program in southwestern Germany. By doing so, it contributes to the expanding body of literature on innovation promotion, providing valuable insights for both innovation researchers and policymakers.
