Subsidising innovation outside or within firms’ existing knowledge bases: which is best for radical innovation?

Perez-Alaniz, Mauricio; Lenihan, Helena; Doran, Justin; Rammer, Christian

Subsidising innovation outside or within firms’ existing knowledge bases: which is best for radical innovation?

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Published Version

Date

2025

Authors

Perez-Alaniz, Mauricio

Lenihan, Helena

Doran, Justin

Rammer, Christian

Publisher

Routledge

Published Version

10.1080/10438599.2025.2486324

Abstract

Public financial support for firm-level Research and Innovation (R&I) can generate important socio-economic returns. This is especially true if firms use this support to develop radical innovation, defined as new-to-market goods and services. However, radical innovation is risky, and prone to failure. Therefore, subsidising radical innovation can also generate sub-optimal socio-economic returns (i.e. policy failure). Understanding how public funding for R&I can be allocated in a way that encourages radical innovation, while avoiding policy failure is crucial. Our paper investigates whether public funding for R&I generates more radical innovation in firms seeking to exploit their existing knowledge base, versus firms seeking to innovate by engaging in knowledge areas that are new to them. We make this distinction using a novel approach, based on the knowledge challenges that firms face when innovating. By merging firm-level survey data with administrative data on public funding for R&I in Ireland, we find that subsidising firms seeking to engage in new knowledge areas, can result in more radical innovation and turnover from radical innovation, compared to firms seeking to exploit their existing knowledge base. These are critical insights from theoretical and policymaking perspectives, regarding the allocation of public funding for R&I.

Keywords

Additionality , Knowledge base , Policy failure , Public financial support for R&I , Radical innovation

Citation

Perez-Alaniz, M., Lenihan, H., Doran, J. and Rammer, C. (2025) 'Subsidising innovation outside or within firms’ existing knowledge bases: which is best for radical innovation?', Economics of Innovation and New Technology, pp.1-29. DOI: 10.1080/10438599.2025.2486324