Market dominance, R&D grant funding, and innovation outcomes

Which companies should receive government R&D grants? Should R&D grants go to already dominant firms, whom one would expect to execute fully in innovation spending to produce better outcomes? Or, should grants go to firms that are less dominant and might need the funding for innovation? Using a novel proprietary panel dataset of over 26,000 firm‐year observations for Irish firms with 1,825 winning grants, this paper provides support for a strategic or efficiency effect: market dominance moderates grant innovation outcomes. Specifically, dominant firms significantly outperform other groups in terms of future R&D spending, R&D growth, and overall employment gains. However, they perform worse than other groups with respect to the employment of in‐house R&D workers, suggesting that dominant firms already have significant R&D capabilities. We also show that dominant firms’ future productivity is not statistically different from similar non‐grant backed dominant firms, potentially implying that they use grant money to retain their existing market position, rather than to capitalize on it and increase productivity by more than their peer firms.