While R&D spillovers has been a central argument for public support of private R&D activities, less is known on the existence and magnitude of innovation policy induced spillovers. This report presents quasi-experimental evidence on the spillover effects of subsidies for private R&D, Eurostars, granted to small- and medium sized firms during 2008—2019.

We measure spillover effects by relying on employee mobility as a source of knowledge spillover between established firms or into employee entrepreneurship. We employ a combination of regression discontinuity (RD) design and difference-indifference (DiD) methods to causally identify the spillover effects on employee entrepreneurship, hiring firms’ performance and employee earnings.

We find no significant difference in the rate of spinoff creation between subsidized and non-subsidized firms. However, our findings confirm that spinoffs of subsidized firms have higher survival rate and employment growth. We also find that the firms that hire former employees of subsidized firms perform better in terms of employment, turnover, value added and productivity, compared to the firms that hire employees from the nonsubsidized firms. These effects are more pronounced among small and medium sized firms, while we find no robust effect on large firms. Contrary to our expectations in the light of the other results, we find no support for any earnings effects among employees.

Our findings have several policy implications. The existence of policy induced knowledge spillovers indicates the existence R&D externalities, thus a premise for public intervention through R&D subsidies. We show that it is important to measure the magnitude of knowledge spillover effects and take this into account when designing innovation policy interventions as well as conducting an ex-post cost-effectiveness analysis. Finally, our analysis shows the importance of labour mobility for diffusion of knowledge from R&D investment, which may be of importance for labour market policies and practices.