LAUSR

R&D is a main driver of growth, whether by generating new ideas for production or increasing technological transfer. However, R&D itself is risky and faces numerous barriers which may reduce its marginal return. Direct R&D subsides are intended to counteract such barriers, but whether they lead empirically to increased economic growth is unclear. In our structural model of the UK, subsidies offset the frictional costs associated with R&D, incentivising innovation and so stimulating productivity growth. We estimate and test this structural model by indirect inference, a method not previously used in work on R&D. We find that even temporary cuts to R&D funding have long-lasting impacts on UK economic growth. The power of the test allows us to calculate tight accuracy bounds for our results and for policy reform impacts calculated using the model. These findings are of high relevance to the ongoing debate around the future UK innovation environment.