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This paper studies whether grants and tax incentives for private R&D are
complements or substitutes. I use multiple quasi-experimental research designs
to examine firms in the United Kingdom and find that increasing tax credit
generosity substantially enhances the effect of grant funding on R&D for small
firms, suggesting that the instruments are complements. Financial constraints
are likely at play. The effects are strongest for firms that appear constrained,
and the combination of policies increases R&D “entry.” Furthermore, I find
that the instruments are substitutes for larger firms, which are usually less
constrained. Some alternative explanations can be ruled out.
