The contribution of innovation actors into business R&D funding – does the substitution effect of public support work in the EU?

Innovation and R&D are becoming a prominent part of policies of countries and transnational unions such as the European Union. This is shown in strategy "Europe 2020" established by EU which prompts member states to invest 3 % of their GDP in R&D. R&D expenditure is an important indicator of innovation performance of a country. However, it is not only important to look at R&D expenditure as one aggregate indicator, but to also consider the contributions of various innovation actors to R&D funding. Since firms are known to be the main innovation actor that creates the biggest amount of innovation in national innovation system, the paper is focused on financing of business R&D. The aim of the paper is to examine business R&D funding from resources of main innovation actors and to analyze the impact of public support of R&D on private R&D investment in EU member states. The research is based on descriptive statistics as well as panel regression and correlation analysis and cluster analysis of 28 EU member states. Our results suggest that the main source used to fund business R&D comes from business sector, followed by public support and resources from abroad. The cluster analysis resulted in four clusters based on the structure of business R&D financing in the EU countries. The analysis of substitution effect of public support of R&D suggests that public support has a positive effect on private investment in business R&D, with the raise of public support for business R&D of 0.1011 % GDP resulting in 1 % increase in business funded R&D expenditure.