The economic impact of subsidized industrial R & D in Israel

Israel offers contingent subsidies to selected industrial R & D projects, with the purpose of creating high-quality jobs, reducing the trade deficit, increasing productivity and promoting growth. In 1987-94, 1,200 firms received $1,400 million of subsidies in support of $3,500 million of R & D (in constant 1996 dollars). We estimate that this R & D generated more than $31,000 million of sales, increasing industrial employment by about 10% and contributing to the trade balance a sum slightly less than the entire private sector deficit in the current account. It added 0.3% to GDP in increased productivity, each dollar of supported R & D adding an additional $0.45 to GDP and earning the economy a direct annual return of 13.4%. Electronics, broadly defined, received roughly half the subsidies while accounting for nearly two thirds of the gains; small firms that received one sixth of the subsidies contributed over a quarter of the gains.